We live in an interconnected world where a slight imbalance in one country hurts the other countries as well. This can be due to the mutual trade between these countries or cross-border investments. Even financial markets are interlinked to each other, not directly, though. In this article, we will highlight the US market effect on the Indian market. We will also focus on European and other Asian markets like China and Singapore (SGX Nifty).
A famous diplomat from France, Klemens Wenzel Metternich, once said: “When the US sneezes, the entire world catches a cold.” This saying has gained even more relevance over the years as America became the world’s largest economy with close to $23 trillion GDP. This saying simply means, whatever happens in the US, its effects are felt globally, and not only just in the US. The global financial crisis of 2007 is exemplary in this context that also goes on to show the US market effect on the Indian market. Let’s dig deeper and first understand how the US stock markets affect their Indian counterparts. Here it goes:
Globalization
Businesses no more work in silos; rather, they have offices in multiple geographies catering to the customers of those regions. Stalwart Indian companies that are listed in the stock market also have offices in the US. Many of the listed Indian companies are also listed in the US stock markets as American Depository Receipts (ADRs) as well. This integration of companies in financial markets explains the US market effect on the Indian
Economic Policies
Two major policy decisions for any country are monetary policy undertaken by the central bank and fiscal policy that is under the purview of the central government. To understand the US market effect on the Indian market, we should look at the interest rate decisions or trade barriers that lead to the trade imbalance of the US with India. For instance: If the US hike tariffs or impose additional duties on steel imports, steel exporters in India and their share prices will get affected. Thus, even a small decision by a developed country can be a reason for volatility in developing countries.
Forex Rates
These are the exchange rates at which currencies are traded in the market. The USDollar is the strongest currency in the world, while the Indian Rupee is relatively weaker. If we have to comprehend the US market effect on the Indian market, look at the trade (import and export) between both countries. India imports a lot of products and services from the US, and thus if the US Dollar increases in value vis-à-vis Indian Rupee then importing companies will have to shell out more money. In a nutshell, increasing the exchange rate will reduce these companies’ profitability, subsequently impacting their share price.
Debt Markets
The debt market is the one in which treasury bonds and commercial papers are traded. This market is highly matured in the US compared to India, where it is still in a nascent stage. The market effect on the Indian market can be understood from bond yields. Rising or falling yields on US Treasury bonds affects many stock markets from the US to Europe and Asia. A rise in yield means increased borrowing costs for businesses that have a presence in the US. It will hamper their future capital expenditure (Capex) plans which is a red flag for many value investors. This will impact the bottom line of these businesses that snowballs into a drop in share price affecting the Indian markets.
News Flow
News is one of the key elements in fundamental analysis in stock investments and trading. This news could be of inflation, GDP growth, election results, COVID-19 relief package, fiscal deficit, etc. These events decide the foreign flows by foreign institutional investors (FIIs), foreign portfolio investors (FPIs), etc. This is one of the important factors to understand the US market effect on the Indianmarket, as these FPI and FII investments move the Indian stock markets.
This was all about the impact of the US stock indices like Nasdaq, Dow Jones Industrial Average (DJIA), and S&P 500 on Nifty and Sensex. Now, we will direct our focus to the impact of Chinese stock markets on the Indian market. Here it goes:
The Chinese market is a big exporter to India when it comes to pharmaceuticals, automobile equipment, electronic goods to name a few. Likewise, China also imports iron ore, steel, aluminium, chemicals, etc. Just like the US market effect on the Indian market, China’s internal policies will hurt their listed companies and thus their stock markets. This impact will be felt by those listed Indian companies who trade with Chinese companies.
For instance
India imports semiconductors (silicon) that are used to make semiconductor chips which are then used in automobiles. There was a supply glut of these chips from China because of which automobile manufacturers are suffering currently in India. Pull up a chart of Maruti Suzuki’s shares to verify the impact of chip shortage on its share price. The biggest company had to cut down on its production by 40% last month owing to this shortage of semiconductor chips. The impact of China’s stock market on the Indian market is more industry-specific compared to the US market’s effect on the Indian market is more policy focussed and macroeconomic in nature.
This is all we had for you in this edition of how do global markets affect the stock markets in India. We hope you had a fair idea of how the stock markets of the US and China have inter-linkages with Indian listed companies. This US market effect on the Indian market will be there in the years to come and it will be more widespread as economies have started to open again as the world is leaving Coronavirus behind.
