The Indian stock market is not insulated from external factors. Any events occurring in America, Europe, and Asia usually have an effect on the trading environment in India. International interest rates, prices of crude oil, exchange rates, and international economic growth have a direct impact on the Indian stock market index.
Understanding these variables helps the investor understand how and why do the indices like Nifty 50 and Sensex respond to any international event.
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How are global markets important for India?
Financial markets in India are very reliant on global markets. Foreign Institutional Investors (FIIs) make huge investments in India through the equity and debt markets.
With stability in the international markets, the investors feel more confident and begin investing in India. It results in the rise of crucial Indian market indices.
In contrast, during times of volatility in global markets, FIIs may pull out their investments and opt for safer options. This may lead to a fall in the Indian stock markets.
Overnight futures and Asian market cues
Prior to the opening of Indian stock markets in the morning, global signals set the initial direction of trade. The early morning moves in the major Asian stock markets, as well as the overnight changes in US futures on equities, have a direct impact on the early buy/sell orders.
A sudden fall in Wall Street generally results in a negative opening of domestic indices, resulting in an immediate impact on the BSE Sensex share price upon market opening, whereas strong rallies in the international stock exchanges lead to positive openings in the markets.
Effect of US Interest Rates
The US Federal Reserve’s monetary policies have strong control over the worldwide capital flow.
An increase in US interest rates makes US bonds more appealing, causing funds from overseas to withdraw money from the developing countries.
A decrease in US interest rates does exactly the reverse; it channels liquidity into the countries that have better yields, such as India, thereby boosting stock prices.
Crude oil price role
India imports more than 80% of its oil needs from other countries, and thus the world oil price is a vital market indicator.
Rising crude oil prices internationally increase the cost of imports to India, inflation, and narrow profit margins for Indian firms. In contrast, reduced oil prices result in low import costs and low inflation rates.
Currency shifts and industry trends
The international economic conditions have a direct influence on the value of the Indian Rupee. The rise in the US Dollar value results in higher costs of energy acquisition, which has a negative effect on consumer-based industries.
However, the fluctuating currency value does not affect all businesses in the same way since the devaluation of the currency favours businesses involved in exporting, such as the IT industry and Pharmaceutical companies, while importers of raw materials are affected adversely.
International growth and geopolitics
India’s corporate earnings continue to be linked to economic performance in its major trading partners. North America or Western Europe showing strong economic growth results in higher demand worldwide for products and services provided by India.
A global recession, trade war, or international political tension leads to great variations in asset prices since investors shy away from risk.
The buffer of domestic capital
Whereas foreign factors cause sudden price movements, domestic involvement helps stabilise them. SIPs and domestic mutual funds help put in regular retail money in the equity markets.
Strong domestic liquidity is capable enough to absorb foreign selling pressure, and this prevents structural falls during temporary global recessions.
Why do the key Indices react so quickly?
The Nifty 50 Index, as well as the Sensex, is made up of India’s largest and busiest firms. Most of these firms are involved in international trade and operate globally.
This is because foreign institutional investors deal with these large-volume stocks the most, and hence the major indices react instantaneously to any changes in the international stock market scenario.
Conclusion
External forces such as central bank policy and oil price movements can have a substantial impact on the Indian stock markets. While domestic economic growth is important in ensuring the sustainability of the market, external factors also determine short-term variations in the market.
A good understanding of both domestic and external factors by investors can help them to make sound financial decisions.
