The Role of Government Policies in Shaping Financial Markets

‘Budget ka chakkar hai baabu bhaiya’

In 2020, my friend Neha invested ₹5 lakh in infrastructure stocks immediately after the Union Budget announcement. That year, the government had announced a ₹1.7 lakh crore bill for road and rail development. Within 8 months, Neha saw a 24% return.

She repeated her strategy in 2022. But this time, the budget focused on rural welfare and health infrastructure. She didn’t adjust her portfolio and invested ₹6 lakh in the same infra-heavy stocks. By year-end, her portfolio had dipped by nearly 9%. Here’s how two very different budgets changed her investment game:

Most investors track company results, stock tips, or even global cues, but they often overlook the elephant in the room: the government and its policies. From tax incentives to subsidies, import duties to capital gains rules, government policies can lift entire sectors or crush investors overnight.

So, in this blog, let’s break down how government actions can influence your financial journey in the Indian financial markets.

A. Monetary Policy

I still remember during the pandemic, loan rates fell so low that everyone started thinking about buying a new car. It was due to the monetary policy set by the government that year. It’s how central banks, such as the RBI or the U.S. Federal Reserve, manage the economy by adjusting interest rates.

When they reduce rates, loans get cheaper, so people borrow more, spend more, and businesses grow faster. And when spending increases, financial markets typically experience a period of strong growth.

For example, Ankit needed a ₹3 lakh personal loan for his sister’s wedding. Initially, interest rates were low, around 11% for a 3-year term, due to the low repo rate. But as the RBI hiked the repo rate from 4% to 6.5%, personal loan rates were 14%. 

His EMI increased from ₹9,832 to ₹10,255. Over three years, he had to repay an additional ₹15,240 due to a policy change. Let’s see his finances before and after the hike:

B. Fiscal Policy

Apart from the monetary policy during lockdown, the government also amended its fiscal policy. I was relieved when the government gave tax relief and extra subsidies. It helped me manage my EMIs and even save a little during tough times. It’s all about how the government collects taxes and spends money. 

When it increases spending, such as on infrastructure, healthcare, or direct transfers, it stimulates demand and business activities. And when taxes are reduced, people have more money in hand to spend or invest.

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For example, Ramesh is a cab driver in Delhi. 4 years ago, in 2021, he lost most of his income during the lockdown. However, he managed the essentials with the help of ₹500/month Jan Dhan cash transfer and free LPG refills for 3 months. 

The government also introduced the ₹1.7 lakh crore PM Garib Kalyan Yojana to increase demand. Let’s see what the other fiscal policy measures taken during COVID-19 were that helped people like Ramesh:

C. Trade and Tariff Policies

Whenever the Indian government changes import duties or signs a big trade deal, it creates a direct impact on the stock market. For example, when India discussed cutting tariffs on U.S. goods, there was a 1.5% surge in the Sensex and Nifty indices. These moves affect business costs, investor mood, and overall market direction.

For example, as you know, the U.S. imposed a 26% reciprocal tariff on Indian goods, including textiles, electronics, and seafood. This move can lead to a decline of ₹1,10,000 crore in India's exports to the U.S., resulting in a 20.2% and 12% drop in sectors such as textiles and seafood, respectively. 

Let’s see how these tariffs will impact other sectors as well, with the help of the table given below: 

Conclusion

Government policies have a direct impact on investment returns, loan costs, and sector growth. ‘Ye to pta chal hi gaya hoga.’ One change in policy will affect your budget and consequently, the interest rates. 

International policy changes affect trade and tariffs. As the consumer and investor, it is your responsibility to understand how these shifts can influence Indian markets.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?