How do International Events Affect Indian Stock Markets?

What happens when the US Fed hikes interest rates? How does the Russia – Ukraine war affect the Indian economy? Why do OPEC’s decisions on world oil supply affect Indian stock prices? How does the rise and fall in the NASDAQ or Hang Seng sway the Indian stock indices? When we hear that the Rupee has strengthened or weakened, what does it really mean for the market movements?

Let’s find out answers to these questions and more on how International elements influence Indian markets. Armed with this, you can follow the geopolitical trends to stay ahead and better predict the expected market movements.

Factors influencing the Indian stock market

In this era of Globalization, companies no longer work in silos. Businesses rely on global sourcing, supply chains, financing, and operations or are even listed on International stock exchanges. In such a scenario, international factors are bound to affect Indian stock markets. 

Let’s have a look at the 5 top influencing factors to watch out for:

1. Global Monetary policies

Monetary policies and interest rates are regularly revised by the Central Banks of the countries to control inflation and sustain stability & growth. These policies, especially for developed economies, play a crucial role in shaping liquidity conditions worldwide. 

For instance, with the US Fed rate hike in March ‘23, the domestic borrowing rate increased. With such rate hikes, domestic investment options for foreign investors tend to become more attractive than riskier investments in emerging markets like India. Hence, they tend to pull out of emerging markets with relatively lower returns, leading to a negative influence on India.

2. Global Fiscal policies

Fiscal policies are government policies governing revenue (taxes) and expenditures. Global fiscal policies by the governments can have effects across the countries’ interest rates, tax rates, relative trading powers, exchange rates, etc, thereby impacting markets globally.

For example, if the US were to hike tariffs on imports from China, it is likely to make Chinese products less competitive. This can boost manufacturing in other countries such as India, thereby positively affecting its markets.

3. Geopolitical events

These are events such as global conflicts, territorial disputes, health crises, treaties or agreements, sanctions, etc which can have potential impact on International relations, global security or balance of power between the nations.

You might be aware that the global health crisis of COVID-19 pandemic coupled with Russia-Ukraine war led to a stumble in the Indian markets as well. The BSE Sensex tumbled by 4000 points in FY21 in the first 20 days itself of the war!

4. Commodity prices

Commodities are raw materials or primary products that are brought or sold. Such as Agricultural products (e.g. Grains), Energy products(e.g. Oil), Metals (e.g. Gold), etc. These are usually traded in specialized market exchanges.

With respect to India, which is a major importer of commodities like oil, metals, etc; if the prices of these commodities rise – it’ll affect the profitability of companies that utilize these materials as raw materials, and therefore, their stock prices are likely to decline.

On the flip side, India is also a major exporter of textiles and certain agricultural products. Higher commodity prices for these products are likely to increase earnings for these businesses, positively impacting their stock prices.

Additionally, higher commodity prices in India, can lead to higher inflation; which further erodes purchasing power and negatively impacts market sentiment.

5. Currency fluctuations

Currency exchange rates can fluctuate as a result of economic factors such as GDP, interest rates, inflation rates etc. as well as political stability and geopolitical events which can change the demand/supply of any currency.

Let’s understand the articles you may have come across like, “The Indian Rupee has weakened against the dollar by moving from Rs 81 per dollar to Rs 83 per dollar and this is likely to impact the market.”

So, Rupee weakening is likely to make the products of export oriented companies in India more competitive to International markets thereby, impacting them positively. Conversely, if Rupee strengthens, the imports led companies such as raw materials, technologies etc will face higher costs and therefore likely to have a negative impact. 

For example, in 2013 Indian Rupee weakened significantly from Rs 55 in January to Rs 65 in September, losing 15% of its value. Being an import heavy country, overall this led to a NIFTY weakening in tandem with the Rupee.

Conclusion

In conclusion, the impact of International events on the Indian stock market cannot be underestimated in this global economy. As investors and market participants, it is crucial to stay tuned to global events and better understand their influence on market sentiments.

Having understood some of these underlying factors, you also need to be cautious to not take these events in silos. These global events coupled with our domestic institutional reactions to these events will show a better picture of the extent of correlation with the Indian markets.

Any other factors or International event that you observed or think is likely to impact the Indian stock market? Please let us know your thoughts in the comments!