Macroeconomics is not to be taken lightly for the Insolvency and Bankruptcy Board of India (IBBI) Valuation Examination valuation examination.
Basics of fiscal policy and Basics of monetary policy are two topics within Macroeconomics as per the latest (year 2020) syllabus prescribed by the Insolvency and Bankruptcy Board of India (IBBI) for the Valuation Examination asset class: Securities or Financial Assets (SFA).
If you are a Chartered Accountant (CA), or Company Secretary (CS), or a Cost Accountant (CMA), this topic may require more than one reading and taking notes to fully understand the nuances. These topics may appear to be ‘general awareness’ topics – but they are not only that. Questions are logically framed and usually required working knowledge of economics.
IBBI requires valuers to understand the linkages between capital markets (therefore, asset pricing models) and macroeconomic factors. A knowledge of macroeconomics helps a valuer develop a well-rounded perspective of the factors influencing company performance. Therefore, macroeconomics has its right place in the IBBI valuer’s exam.
What weightage does the syllabus accord for macroeconomics? Expect 3 or 4 questions from this section at the most. That’s about 3% of total weightage as per the latest (2020) syllabus accessible here --> (https://ibbi.gov.in/SFAsyllabuswef01062020.pdf).
The difficulty level of this topic (and the efforts) versus the marks allotted for the final exam are a little unbalanced. In fact, previously the valuer exam provided 4% weightage to the topic of macroeconomics. Subsequently this has been reduced to 3% since the revised syllabus was published on 1st January 2019.
Nevertheless, the topic is not rocket science. Most of us have been acquainted with macroeconomics through business newspapers or stock market television channels. Just that it is now formally presented with its own definitions and logic.
A couple of readings for the above-mentioned professionals is necessary. For a freshly minted student of Masters of Business Administration (MBA), or one working in the investment industry, this area of testing is a low hanging fruit. Just one reading will refresh your memory.
Now, let’s move on to fiscal and monetary policy
Fiscal policy is the primary means by which a government affects its economy. It adjusts its spending levels and tax rates to guide an economic growth. It is the sister strategy to monetary policy through which a monitoring financial institution, usually a central bank, influences a nation's monetary supply. These two policies are utilized in various combinations to direct a country's economic goals
Let’s take a glance at how both these policies work, how they must be monitored, and the way their implementations may affect different people in an economy. Using a mixture of monetary and fiscal policies, governments can control macroeconomic conditions of the market.
Fiscal policy is predicated on the theories of British economist John Maynard Keynes. Also referred to as Keynesian economics, this theory states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, controls inflation, decreases unemployment, and maintains a healthy value of the currency.
Fiscal policy plays a really important role in managing a country's economy. For example, in 2012 many worried that the fiscal policy followed by the USA would hurt the economy. At that time, the government was following a policy of simultaneous increase in tax rates and cuts in government spending.
The challenge that every government has regarding fiscal policy is finding a balance between tax rates and public spending. Let’s take for example, a stagnant economy. In order to stimulate it, the government may do this by increasing spending or lowering taxes, also known as expansionary fiscal policy. But this is a double edged sword, since it runs the risk of causing inflation to rise. As why inflation may rise is because an increase in the amount of money in the economy, followed by an increase in consumer demand, can result in a decrease in the value of money.
Fiscal policy usually affects all, but nearly never in the same way. Depending on whom the fiscal policy wants to protect or depending on the goals of the government, a class may be hit harder than the rest.
Stock markets go up in response to expansionary fiscal policy. However, this doesn’t imply that expansionary policy is the right policy at all times. Reactions in the stock markets may be driven by short term concerns.
Monetary policy refers to the actions undertaken by a nation's regulatory institution, the central bank, to regulate monetary supply and achieve sustainable increase in the productivity of the country, resulting in an economic growth.
Monetary policy consists of the management of supply of money, credit and interest rates. It usually aims to complete some macroeconomic objectives like controlling inflation, consumption, growth, and liquidity. Monetary policy is often classified as either expansionary or contractionary.
In order to achieve its policies, the regulatory body may use a variety of tools. Tools include open market operations, direct
lending to banks, bank reserve requirements, unconventional emergency lending programs and managing market expectations. This is achieved by actions such as modifying the interest rate, buying or selling government bonds, regulating foreign exchange rates, and changing the amount of money banks are required to maintain as reserves. Such developments have a long-lasting impact on the general economy, also as on specific industry sectors or markets. Analysts, investors or other finance professionals pay attention to the monetary policy since it has big impact on the economy and in finance.
Monetary policy is data driven.
Monetary policy is formulated through inputs gathered from a spread of sources. For instance, the monetary authority usually checks out macroeconomic numbers like gross domestic product (GDP) and inflation, industry/sector-specific growth rates and associated figures. It also takes into consideration the region or global geopolitical developments in international markets, including embargos or trade tariffs. Central banks may even take into consideration the opinions of groups representing industries regarding concerns and negative effects that the policy may have on them. If a central bank announces a particular policy to put pressure on increasing inflation, the inflation may continue to remain high if the common public has no or little trust in the authority. Credibility of the central bank is important.
Monetary policy objectives
Monetary authorities usually have a few but very important objectives to fulfil through the monetary policies, such as realizing a stable rise in GDP, keep unemployment low, and maintain exchange and inflation rates under a specific range. Monetary policy is often utilized in combination with or as a supplement to fiscal policy, which uses taxes, government borrowing, and spending to manage the economy.
The role of RBI
The Reserve Bank of India is responsible of monetary policy within the India. The RBI has primary mandate of inflation control. Its secondary objective is to realize higher economic growth while keeping inflation inside a range specified by them. Simply put, it's the RBI’s responsibility to balance economic growth and inflation. Its core role is to be the lender of in worst case scenarios, providing banks with liquidity and regulatory scrutiny so as to stop them from failing and panic spreading in the financial services sector.
When making investment decisions, it is also important to foresee the impact of monetary policies and if they will achieve the end result or not.
Hopefully, this article has given you a brief overview of budget, fiscal policy and monetary policy. A valuer registered under the Insolvency and Bankruptcy Board of India (IBBI) is expected to have a basic level of knowledge of economics.
For most of us, valuers, we accord greater importance to accounting and valuation techniques. The topic of macroeconomics is something we must make efforts to study (except students of MBA or economics graduates).
As a professional valuer, a good knowledge of economics helps you defend your valuation inputs such as terminal growth rate (or temper your estimates) or assumptions of yield or interest rate, cyclical industries and other broad capital market assumptions.
For students of the valuer examination, please download the syllabus here > (https://ibbi.gov.in/SFAsyllabuswef01062020.pdf) and carefully check the topics listed within the macroeconomics section. A word of advice would be to stick to the topics stated in the syllabus and prepare in a concentrated manner. This helps you save time. If you have a macroeconomics textbook, select and mark the topics asked in the IBBI syllabus. The whole subject of macroeconomics is vast. The valuation examination does not expect you to become a master in the subject. A typical macroeconomic textbook is 300-400 pages long (https://www.amazon.in/Macroeconomics-N-Gregory-Mankiw/dp/9386668424/ref=sr_1_3?dchild=1&keywords=mankiw&qid=1609209271&sr=8-3). This is why adhering to the syllabus is very important. The weightage in the syllabus for macroeconomics (serial no. 1) is only 3%. Hence, do mindfully prepare for this section.