Factor 7 - Fiscal Policy

In Unit 5 of this module, we have learned how monetary policy affects the stock market. Now, let us discuss how fiscal policy affects the stock market. 

The Fiscal Policy consists of the tools used by the government such as Capital Expenditure, Spending, Transfer Payments & Taxes to influence economic growth in a country.

This relationship is the most straightforward and there isn't much to deliberate on this topic. If the government follows an expansionary fiscal policy viz increases spending on Social Infrastructure such as healthcare, education, public facilities, transportation, etc, reduces personal/corporate tax rates, raises unemployment benefits, etc. with a motive to increase the money supply in the economy. 

It is self-explanatory by now that equity markets tend to thrive on loose money supply coupled with expansionary fiscal policies. The Covid Crisis evoked a similar response as Central Banks all over the globe injected trillions of dollars into the financial ecosystem by cutting interest rates to near-zero & Governments loosened their purse strings in the name of stimulus measures.

The extent of market merriment on receiving such news can be adjudged from the Mrs. Nirmala Sitharaman Candle on the Nifty Index dated 21st September 2019. Mainstream indices- Nifty 50 & Bank Nifty rallied almost 6% and 10% respectively in a single day. And the reason? - Corporate Tax Cuts.