Economic Analysis – NISM Series XV Research Analyst Short Notes (Part 5)
This is Part 5 of the NISM Research Analyst Short Notes series on PassNISM.in. Economic analysis is one of the most important chapters in the NISM Series XV syllabus. It provides the macroeconomic foundation that every research analyst needs before studying industries or individual companies.
Understanding the economy helps analysts determine whether the overall business environment supports growth or contraction — and how different sectors and companies will respond.
Branches of Economics Microeconomics
Microeconomics studies the behaviour of individuals, households, and firms. It focuses on how consumers make decisions about what to buy, how companies decide what to produce, and how prices are set in individual markets. The key principle is that prices and production levels are driven by consumer demand.
Macroeconomics
Macroeconomics studies the economy as a whole. It focuses on aggregate factors such as:
- Gross Domestic Product (GDP)
- Inflation and price levels
- Unemployment rates
- Savings and investment rates
- Government fiscal policy
- Central bank monetary policy
Two major forces shape macroeconomic policy — the government (fiscal policy) and the central bank (monetary policy, administered by RBI in India).
Importance of Macroeconomics for Research Analysts
Research analysts use macroeconomic data to:
- Understand the general state of the economy — production, consumption, growth, and quality of life
- Identify drivers of income, savings, investment, and employment
- Interpret how government and RBI policies will affect businesses and markets
- Analyse international trade dynamics — exports, imports, balance of payments, and exchange rates
- Understand how global economic linkages affect the Indian economy
Key Macroeconomic Variables 1. National Income
National income is measured through three equivalent methods — all should theoretically give the same result:
Product Method (Output Method)
National income = total market value of all final goods and services produced in the economy during a specific period. Covers three sectors: agriculture, industry, and services. This is commonly referred to as GDP (Gross Domestic Product).
Income Method
National income = aggregate income earned by all individuals and entities in the economy:
- Employees earn wages and salaries
- Professionals earn fees for services
- Entrepreneurs earn profits (including undistributed corporate profits)
- Investors earn interest on capital and rent on land
Expenditure Method
National income = aggregate demand for goods and services:
GDP = Private Consumption + Government Spending + Gross Capital Formation + Net Exports (Exports − Imports)
2. Savings and Investments
Savings = Income − Expenses. National savings is the sum of savings by households, corporates, and government.
Savings must be channelled into productive investments. Higher savings and a higher conversion of savings into investments are considered positive signals for an economy's long-term growth. Countries with high investment rates tend to grow faster.
3. Inflation
Inflation is the general rise in price levels of goods and services over time. It erodes the purchasing power of money. Inflation is measured in India through two indices:
- Wholesale Price Index (WPI) — Measures price changes at the wholesale/producer level
- Consumer Price Index (CPI) — Measures price changes at the retail/consumer level. RBI uses CPI as its primary inflation target.
Moderate inflation (around 4% in India's case, per RBI's target) is considered healthy for growth. Hyperinflation or deflation are both harmful.
4. Unemployment Rate
The unemployment rate measures the percentage of the labour force that is willing and able to work but cannot find employment. Higher employment means more income for households, which drives consumer spending and economic growth. High unemployment signals economic stress and reduced consumption.
5. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI)
| Parameter | FDI | FPI |
|---|---|---|
| Nature | Active investment in business operations | Passive investment in financial securities |
| Stability | Long-term and stable | Short-term, can exit quickly ("hot money") |
| Benefits | Capital + technology + jobs + knowledge transfer | Capital inflow, market liquidity |
| Risk | Lower systemic risk | Can cause market volatility if large exits occur |
Exam Note: FPI is called "hot money" because it can exit rapidly, creating systemic risk. FDI is long-term and stable, benefiting developing economies.
Fiscal Policy and Its Impact on the Economy
Fiscal policy refers to the government's use of taxation and expenditure to influence the economy. The key measure of fiscal discipline is the fiscal deficit.
Fiscal Deficit = Government Expenditure − Government Revenue (when expenditure exceeds revenue)
Similarly, Current Account Balance = Total Receipts − Total Payments
Types of Fiscal Policy
| Type | Definition | Effect |
|---|---|---|
| Neutral Fiscal Policy | Government income = Government expenditure | No net stimulus or drag on the economy |
| Expansionary Fiscal Policy | Government income < Government expenditure | Stimulates growth; increases deficit |
| Contractionary Fiscal Policy | Government income > Government expenditure | Reduces deficit; cools overheating economy |
Fiscal policy influences aggregate demand, supply, savings, investment, and overall economic activity in the country.
Monetary Policy and Its Impact on the Economy
Monetary policy is administered by the central bank (RBI in India). It manages money supply, interest rates, and inflation to promote economic growth and price stability.
Expansionary Monetary Policy
Used when the economy needs a push. The central bank:
- Increases money supply
- Reduces interest rates (repo rate cut)
- Makes borrowing cheaper, stimulating investment and consumption
Contractionary Monetary Policy
Used when the economy is overheating or inflation is too high. The central bank:
- Reduces money supply (or slows its growth)
- Raises interest rates (repo rate hike)
- Makes borrowing more expensive, cooling demand and inflation
Key Point for Exam: RBI uses the repo rate as its primary monetary policy tool. A repo rate cut = expansionary; a repo rate hike = contractionary.
International Trade, Exchange Rates, and Current Account
- International trade is the total trade (exports + imports) between a country and all other countries
- Exchange rate is the value of one country's currency relative to another (e.g., ₹ per US$)
- Current Account Deficit (CAD) occurs when a country imports more than it exports (Imports > Exports)
- Current Account Surplus occurs when exports exceed imports (Exports > Imports)
India typically runs a current account deficit due to high crude oil and gold imports.
Globalisation
Globalisation is the ability of individuals and firms to produce, buy, and sell goods and services anywhere in the world. It also means capital and people flow to where they are most productive.
Positives of Globalisation
- Optimal allocation of global resources
- Integration of economies, creating growth opportunities
- Lower prices and more product choices for consumers
- Greater access to global cultures and knowledge
Negatives of Globalisation
- Increases income inequality within countries
- Higher competition for domestic businesses
- Economic problems in one country quickly spread to others (contagion risk)
Economic Trends — Three Types Secular Trends
Secular trends are long-term, structural shifts driven by fundamental changes in technology, demographics, culture, income levels, or government policy. They play out over decades. Example: digitalisation of businesses is a secular trend that has created winners (tech companies, fintech) and losers (print media, physical retail).
Key drivers of secular trends:
- Technological advancement
- Changes in income and consumption patterns
- Demographic shifts (ageing population, urbanisation)
- Evolving culture and consumer preferences
- Changes in regulation or government policy
Cyclical Trends
Cyclical trends are medium-term fluctuations tied to economic cycles. They are observable at multiple levels:
- Economic cycle — Boom and recession phases of the overall economy
- Commodity cycle — Periods of rising and falling commodity prices
- Inventory cycle — Build-up and depletion of inventory by businesses
Seasonal Trends
Seasonal trends are highly predictable fluctuations linked to the natural calendar. They are driven by the inherent nature of the goods and services. Examples: agricultural output peaks during harvest seasons; consumer goods sales spike during festive seasons; tourism picks up during holidays.
Role of Economic Analysis in Fundamental Analysis (EIC Framework)
Economic analysis sits at the top of the Economy-Industry-Company (EIC) research framework. It tells analysts:
- Whether the overall environment is supportive for business growth
- How GDP growth, interest rates, and inflation will affect corporate earnings
- Whether monetary and fiscal policies are accommodative or restrictive
- What risks and opportunities exist from global developments
Only after understanding the macro picture should an analyst move to industry and company analysis.
Quick Revision — Exam Focus Points
- GDP = Product method = Income method = Expenditure method (all three should be equal)
- CPI is used by RBI for inflation targeting (4% ± 2% band)
- FPI = hot money; FDI = stable long-term capital
- Fiscal deficit = Government expenditure > Government revenue
- Expansionary fiscal policy: Government spends more than it earns
- Expansionary monetary policy: Lower interest rates, more money supply
- CAD (Current Account Deficit): Imports > Exports
- Three types of economic trends: Secular (long-term), Cyclical (medium-term), Seasonal (short-term, predictable)
- Secular trend example: Digitalisation; Cyclical trend example: Economic boom/recession
- Economic analysis is the first step in EIC (Economy → Industry → Company) framework
Coming Up Next
Part 6 of our NISM Research Analyst Short Notes series covers Industry Analysis — including Porter's Five Forces model, PESTLE analysis, BCG matrix, business life cycle, industry cyclicality, and value migration.
Test yourself with free practice questions at Research Analyst Free Mock Test.