Impact of the Global Economy on the Indian Stock Market

Globalization is a boon for the modern economy. A good or service produced in another country can reach you right at your home. Businesses have also overcome geographical barriers and have traversed international markets to expand and enhance their profitability. Today, countries are interconnected with one another even if their borders separate them.

In today’s global world, the international economy has an impact on the Indian stock market too. Surprised? Don’t be! How often do we have to see the Indian stock market fluctuate on global cues?

The dynamism of the Indian stock market

The Indian stock market is influenced by a lot of factors, both macroeconomic and microeconomic. For instance, the COVID pandemic sent the stock market reeling as both the NSE and the BSE indices suffered heavy setbacks. On 23rd March 2020, the NSE dipped by 1150 points while the BSE dipped by 4000 points. While the physiological impact of the pandemic was expected, the financial impact could also not be avoided.

Similarly, the Indian stock market is affected by different factors, global economies being one of them. A common instance is the 2008 Global Financial Crisis which originated in the US, but its impact was also felt in India as the GDP fell by 1.2% and the stock market suffered as USD 12 billion worth of stock investments were liquidated.

So, the global economy has an impact on the Indian stock market. The question is whether the impact is positive or negative, which depends on international monetary and fiscal policies. Have a look at how the Indian stock market fares against international markets –

(Source: https://www.linkedin.com/pulse/how-global-markets-affect-indian-cosmos-capital-private-limited/)

Here’s a look at some of the instances in how the global economy impacts the Indian stock market –

1. Impact of movements in the Dollar Index

The Dollar Index measures the US dollar value against a basket of other international currencies. If the US Dollar strengthens, the Index rises and vice-versa. The Index is inversely related to the Indian stock market. The reason is simple – If the Dollar weakens, the Index falls. This makes the Indian markets more attractive as investors can get more profits by investing in INR than in USD. The opposite is also true when the USD strengthens. In such cases, FII depletes, and the Indian market suffers as Dollar-backed investments seem more lucrative.

Moreover, as the US Dollar strengthens, importing companies have to shell out more INR to import goods and services. This impacts their profitability as costs increase. Falling profitability converts into falling share prices. If multiple Indian companies experience falling share prices, the stock market gets negatively impacted.

2. Prices of crude oil

India exports a majority part of its oil requirements. If crude oil prices increase, it increases the cost of inputs and results in a trade deficit. This might lead to inflation. Moreover, for companies depending on crude oil for their production and manufacturing activities, costs increase, affecting their profitability. Affected profitability also affects share prices, and the stock market suffers. So, as crude oil prices rise, the Indian stock market might suffer.

In recent times, the Ukraine-Russia war is affecting oil prices. As such, as the economies of these countries are being affected, the effect is being felt in the Indian stock markets too.

3. Bond yields in foreign countries

The US bond market is a popular investment avenue for many investors. As such, if there are changes in the bond market, the effects are felt by international investors too. If the interest rates rise, US bonds become more attractive for investors. As such, they might direct their investment from the stock market, which is risky, to the bond market, which is safer. As stock investments reduce, the stock market gets affected negatively.

The global economy, thus, impacts the Indian stock market because investments are no longer localized or domestic in nature. With investors getting access to the international markets, too, the Indian stock market is impacted by the overall condition of the global economy.

That being said, India is a rapidly developing country with its economy rising steadily. So, though the global economy impacts the Indian stock market, the impact might not be very severe. The Indian stock market can recover from initial shocks and grow.

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So, as an investor, you should keep an eye out for international events and the global economy. See how the other countries are faring and how their economy can affect your stock investments. While you might choose quality stocks, their performance might get impacted by international events, and so, as an investor, a holistic knowledge of the financial markets is a must.