How does government policy impact the stock market?

An every economy stands on the two policies; those are fiscal policy and monetary policy. Fiscal policy stands that the government regulates its expenditure level and tax rates to provide stable economy, while as monetary policy stands that the central bank of the nation make policies to regulate the healthy economic activities.
Every stock exchange is directly or indirectly depends on these two policies (fiscal and monetary). Some nation may have independent regulators; in some way has indirect impact on the stock exchanges. We can study this concept by dividing the central bank’s monetary policy and fiscal policy.

Monetary policy

Monetary policies are the policies formulated by the central bank of the respective country. The central bank’s primary role is that monitoring the economy by adjusting its interest rates, open market operations and influencing the money supply. For example, cutting interest rates by central banks may give thrust to borrow; it may discourage the company and investors depositing money in the fixed income assets.

Fiscal policy

Fiscal policies are the policies formulated by the government of the respective country. The government has a major rule in formulating tax rates, government spending, and government influence on the selected sectors.
– Tax rate variation: The increase or decrease in the tax rates or slabs may have an impact on the borrowers and investors. The higher the tax rates may discourage the investors and companies from being less return in the future.
– Bailout or bankruptcy: Providing bailouts can change economy scenario, by taking concern on the loss making companies. The bailouts of the rescued company could have an impact on the shareholders. There is likely that in normal conditions, these rescued companies may go out of track.
– Subsidies: Providing subsidies to the selected industry may boost the confidence of the companies market in the economy. Subsidy may go with cutting tax rates to the providing simple rules in accessing the markets.
– Tariff rates: these are the tax rates set by the government on accessing to the foreign goods into their territory. Lesser the tariff rates may have direct impact on the similar domestic industries. There by making imbalance in the balance sheet of the nation.
– Corporate tax: corporate taxes are being paid by the corporate companies. The increase in the MAT (Minimum Alternative Tax) could discourage the companies having less profit. Higher corporate tax makes companies by paying higher tax and makes it to infeasible in the market.

Author: Editorial staff of 70trades reviews blog