Impact of US Market on Indian Market - Blogs By CA Rachana Ranade

How do the US Stock markets Impact Indian Stock markets?

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Our ancestors have gifted us holy books such as Vedas, Upanishads, Mahabharata, Ramayana, Bhagavad Gita, and many more. These holy books are said to have all the answers to every question/problem that humans, animals, plants, and even micro-organisms, on this planet can go through. Our great grandfathers used to study these books in depth to live and lead a soulful life. But today, whenever we have any doubt, we just Google it!

Since the last few decades, the West has had a huge impact on the world. They have completely changed the way we live, eat, dress, communicate, shop, work, travel, entertain, etc. US companies like Google, Amazon, Microsoft, Netflix, Facebook, Dell, Intel, etc. have been huge contributors towards this shift, not only in India but across the world.

No wonder why the US has the largest economy in the world! This is the reason why smart investors like us, must understand how the US stock market affects our Indian stock market.
So, let’s find out…

1. Globalization

Globalization has led to a borderless economy i.e., global economy. Economies, industries, and businesses are now interconnected and interdependent. It has caused the integration of financial markets and improved their efficiency. This ultimately has encouraged foreign inflows into developing and emerging economies like ours. Top companies listed on Nifty/Sensex, obviously have an international presence. Hence, events happening around the world and especially in the US may impact these companies directly or indirectly which is further reflected in the Indian indices.

2. Economic Policies

Various Economic policies like Monetary Policies, Fiscal Policies, Trade tariffs, etc do impact businesses and influence the US market. This is again reflected in the Indian market for the reasons discussed above. E.g., if trade tariffs are increased in the US, then the Indian businesses exporting to the US will be adversely impacted which will affect their profitability. This will cause a temporary plunge in the US & Indian stock markets.

3. Exchange rate

USD is a dominant and widely accepted currency around the world. Our INR is a comparatively weaker currency. India exports more to the US than what it imports from the US. Let’s continue with our previous example. If tariffs are hiked, it means the Indian exporters would have to pay more than what they used to for the same volume being exported. This is nothing but depreciation in the value of INR. Thus, higher rates can adversely impact their profitability leading to a short-term downfall in the market.

4. Bond Market

I am sure you might have heard about the rising 10-year US Treasury yield frequently in the news. If you don’t understand what is yield, don’t worry, I have made a separate YouTube video on the same. Make sure you check it out below.

Rising US Treasury yield indicates an increase in borrowing costs for businesses operating in the US. This discourages businesses to borrow money for their future plans and/or increase their interest expenses. Investors view this negatively as this rise is going to affect the profitability of the businesses which domino into a temporary fall in both the markets.

5. Event /News driven

In the US, event-driven market movement can be due to policy announcements, employment data release, inflation, GDP growth, US elections, Covid stimulus, etc. E.g. when President Biden announced a $1.9 Trillion stimulus package, it was appreciated by the US market, as it bounced back amid rising Treasury yield, inflation, and UK variant Covid Cases. The same was reflected in Indian markets as well with higher FII and DII inflows during the time.

Bottomline

Global markets are interconnected and hence, we can’t just make an investment decision without understanding the largest economy viz the US. To understand it in the most simplified manner stay tuned to my YouTube channel as I will be covering “Basics of US Stock Market” soon. Until next time, Goodbye!