Global and domestic macroeconomic events can have a greater impact on your finances than you would think. Here is a quick guide.

"You only find out who is swimming naked when the tide goes out," said Warren Buffett. As a retail investor, you might well be caught unawares by sudden market shifts, like the one in January. Bhavesh Shah, vice-president (research), Asit C Mehta Investments, says: "The fall was more an issue of liquidity management than trust in India's growth." This only goes to show that small investors cannot ignore macroeconomic events if they want to survive — and thrive — in times of volatility. The threat of recession in the US, FII investments in India, and now, the Budget, are all factors that could affect your wallet.

Amid the rush of not-so-pleasant news, there's a lot that's positive in the economy. There are as many silver linings as there are dark clouds on the economic landscape. So, although economic growth in 2007-8 will be slower than last year, it will still be an impressive 8.7%. There's a slowdown in home and car purchases — especially credit-financed — but the cost of borrowing is beginning to fall. The US economy is in a downturn, but that might benefit some Indian companies just as it might harm others.

Obviously, the time for a carefree ride to wealth creation is over. Doing homework before investing was always necessary. Now it's obligatory. "I would also ask investors to prepare a matrix. This will give them an informed view on the market," says Shah. Remember that most experts are still positive about investing in India. A recent JP Morgan report says that fiscal reforms "and some restraint on government spending... have contributed to the improving fiscal dynamics". A Credit Suisse report is even more bullish: "India is likely to be on a highly reflationary policy drive in the coming weeks, unlike most others in the emerging world."

No matter how much the finance minister makes you richer — or poorer — on 29 February, there is something he has already done to make you a more intelligent investor. Three years ago, by restructuring Section 80C of the Income Tax Act, he moved away from an era of government-dictated tax investing to need-driven investing. Freedom, be it of economy or investing, can be made most of only if you do your homework well.

Sensex & Budget

Crash, boom, bang...That seems to be the response of the key market indices after every Budget speech. Investor sentiment veers wildly immediately after the Budget, usually pushing the indices down. And this generally has little to do with the provisions of the year's most important financial statement. In fact, the only one of P Chidambaram’s Budgets (during his second stint) that caused the Sensex to nosedive was his most people-friendly one (2005-6).

Obviously, the market is least interested in whether tax slabs are simplified or not, or what taxsavings are offered. Index gyrations in the run-up to, and immediately preceding the Budget speech, are largely because of market expectations and kneejerk interpretations. But, as the graphs on the right show, the indices generally bounce back in the days following the Budget, proving eventually that it is fundamentals and not sentiment that drives the markets.

Source: Money Today