Tip - Change in repo rate directly affects EMI’s and Interest rates which influence the common man’s life in short term, Also affects the Inflation in economy. How ? Read below to know.

               

Effects of Repo rate on Inflation

When the repo rate is raised, banks are compelled to pay higher interest to the RBI which in turn prompts them to raise the interest rates on loans they offer to customers. The customers then are dissuaded in taking credit from banks, leading to a shortage of money in the economy and less liquidity. So, while on the one hand, inflation is under controlled as there is less money to spend, growth suffers as companies avoid taking loans at high rates, leading to a shortfall in production and expansion. For instance, if the availability of funds is scarce, and banks are not able to borrow at repo rate, they may have to increase the deposits rates upwards to attract depositors. Hence, any rate hike in repo rate increases the probability of higher deposit rates, which is good news for depositors.

How to invest in stock market by fundamental analysis using P/E ratio ?

I am thinking to build my investment portfolio, though diversified but one of the major component has to be equities, specially long term equities. With this thought, same question like many others out there, starts boggling into my mind and i am pushed to ask myself, is it the right time to get into the stock market ? Should i wait for some more time, get cornered and see how the market behaves or i can jump into the market straight away and start investing ?

To be honest, no one has a straightforward answer to this question, each one of us has a different perspective/analysis on how the market would behave. Here is what i and my brother found our during our discussion ...

Indian stock markets are touching a new high almost every other day now. Stocks are outperforming to their 52 weeks high. Many Brokers and investment firms like CLSA are claiming that NIFTY50 would reach 10k in 2018. 

I wonder what has changed in the fundamentals of the company or their sector for their outburst performance in the market. Is the company really growing at the same pace in correspondence to their stock market price? This may have happened that the company changed its working business model or got more number of contracts  and company's growth outpaced its competitors or sector wise reforms taken by the government helped the company rise. Industry sector growth can also be the result of global factors or the domestic market cue's.

If the Industry and its within companies are outperforming because they leveraged their fundamentals then why 100's of stocks declined after they declared their quarterly earnings in May 2017. Correction in these stocks was seen up to 10-12% in one single day. Stocks would not have such a free fall in their stock price if they are fundamentally strong.

We did some more analysis and checked for the P/E ratio of different sectors and specific stocks. 

P/E ratio of a company is simply the Market price / Earning per share (EPS). 

P/E of the Industry  = Sum of P/E ratio of all the companies in that industry / Number of companies in that industry.

Currently, this is the market sector-wise, breakdown -

By this chart, this can easily be figured out that how many times each sector is overpriced than its current valuation on 23rd June 2017. Consumer Non-Durables's industry is approx 51 times overpriced than its current valuation.

Individual stock P/E could be different than Industry P/E. P/E of 2 different stocks in the same industry can be used as one of the factor to evaluate where to invest. Lower the P/E, better the chances. For example, Dabur Inc P/E as of June 27th, 2017 is approx 40 and P/E of Emami is 70.79 where as the Industry P/E is 54.3.

Apart from P/E, there are several other factors that can be considered while evaluating a stock for investment, though I would not go in details for the same in this article. But, current valuation of the market is highly overpriced. So, before investing, do some analysis and invest carefully !!!