Which of the following are responsible for the fluctuations in the Sensex?
- Monetary policy
- Political instability
- Rain
- None of the above
Answer: a. Monetary policy
Answer Explanation
It is the monetary policy of the country that mainly influences the fluctuations in the Bombay Stock Exchange (BSE) benchmark index, the Sensex. In India, the central bank, the Reserve Bank of India (RBI), controls the monetary policy. To regulate monetary policy, the RBI uses the repo rate, reverse repo rate, and cash reserve ratio (CRR).
When the RBI lowers the repo rate, banks are able to borrow money at a lower rate, leading to increased liquidity. By lowering interest rates, businesses and investors are more likely to take out loans, which leads to more stock market investments, resulting in the Sensex rising.
In contrast, if the RBI raises its repo rate, banks are forced to pay more to borrow money, resulting in a reduction in liquidity. A higher interest rate discourages businesses and investors from taking loans, resulting in a fall in the Sensex because they are discouraged from investing in the stock market.
Why the other options are not correct
b. Political instability:
In spite of the possibility that political instability can affect investor sentiment and certain sectors of the economy, it does not affect the Sensex’s fluctuations directly. Stock market performance is influenced by overall economic performance and corporate earnings, which are more influenced by factors like monetary policy, GDP growth, and corporate profitability. Sensex fluctuations are not primarily driven by political stability, but it can contribute to the broader economic environment.
c. Rain:
Rainfall and weather conditions can affect specific sectors, such as agriculture, but they do not significantly influence the overall Sensex. As a measure of the performance of the top companies listed on the Indian stock exchange, the Sensex fluctuates depending on broader economic indicators. The Sensex does not move sustainably due to extreme weather conditions, although they may have short-term localized effects.
d. None of the above:
There is a correct answer so, this option becomes incorrect.
Conclusion
The correct explanation for fluctuations in the Sensex is (a) Monetary policy. The Reserve Bank of India’s decisions about the repo rate, reverse repo rate, and CRR play a crucial role in influencing liquidity, interest rates, and investor sentiment in the stock market, which affects the Sensex’s movement.
Instability in politics and weather conditions can affect certain sectors and the overall economic environment, but they do not directly affect Sensex fluctuations. To understand and predict how the Sensex will move, investors and analysts primarily consider macroeconomic factors and the central bank’s monetary policy stance.