The Indian economy is far from the only factor influencing the country’s financial markets. As a matter of fact, the various global macroeconomic indicators also play a huge role in influencing how the stock market performs.
Although there were no major issues with the Indian economy per se, the slowdown in the global economy, specifically Europe’s recession, during Q3 2024 dragged the markets down. It even caused the country’s currency to depreciate to ₹83.270 against the USD on November 3, 2023.
There are many other instances, such as the one above, that essentially indicate that global economic factors have a major impact on emerging financial markets like India’s. In this article, we’re going to explore some of the key economic indicators and their impact on our markets.
Global Economic Indicators and Their Impact on Indian Financial Markets
Although there are many economic indicators that could impact Indian markets, very few have as much influence as the following factors.
1. Global Interest Rates
Central banks worldwide use interest rates as a tool to regulate the economic activity of their respective countries. Even a minor change in the monetary policies of major central banks, such as the U.S. Federal Reserve or the European Central Bank (ECB), could have significant repercussions on currency exchange rates and Foreign Direct Investment (FDI) into India.
For instance, an interest rate cut by the U.S. Federal Reserve would make borrowing in the country more cost-effective. Additionally, it would also make domestic U.S. investments less attractive, prompting foreign investors to look for emerging economies that offer better returns. The combined effect of both is likely to lead to a positive inflow of foreign funds into the Indian markets, leading to a rise in stock prices.
In fact, the mere mention of a possible US Fed rate cut starting in 2024 led to the Nifty and Sensex going up by about a percentage point on December 14, 2023. That said, if the Federal Reserve were to raise interest rates instead, it could have the opposite effect on the Indian financial markets.
2. Value of the USD
The U.S. Dollar is the de facto currency of the world. Almost all the countries in the world use the USD to settle their trade dues with other nations. This essentially means that any change in the value of the currency, which is usually measured using the Dollar Index, could potentially have a major effect on the Indian markets.
The Dollar Index shares an inverse relationship with the Indian financial markets. For example, if the value of the USD weakens and the index falls, Foreign Institutional Investors (FIIs) are likely to increase investments in India since the INR becomes more attractive compared to the USD. However, if the U.S. Dollar rises, FIIs tend to pull out of the Indian markets, which can lead to a major fall.
3. Inflation Rates
In addition to domestic inflation, global inflation rates also play a major role in the performance of the Indian financial markets. A rise in the inflation rates of the U.S. and the U.K. could lead to price hikes in the respective countries, prompting their central banks to step in and raise interest rates as a countermeasure.
As you’ve already seen, rising interest rates in global economies have the potential to negatively impact Indian financial markets. That’s not all. Global inflationary pressures have a way of permeating into the Indian economy as well, leading to a rise in domestic inflation, which is another factor that could lead to a stock market sell-off.
4. Crude Oil Prices
Crude oil is a major lifeline for countries. This crucial fossil fuel resource is responsible for the smooth functioning of many aspects of a country’s economy. Any disruption in supply or prices could bring entire economies to a grinding halt, considering that most industries and the transportation sector rely on this resource.
For instance, an increase in crude oil prices could lead to India’s trade deficit widening, considering that we import the majority of our oil from other countries. Additionally, a rise in the price of this precious resource may also lead to a hike in input costs and transportation expenses for companies, negatively impacting their profitability. And, as you may have guessed, lower profits mean negative stock market performance. The Russia-Ukraine war, for instance, resulted in more than a 70% change in the prices of Brent crude oil and WTI crude oil.
Conclusion
Global economic indicators are critical metrics that help us assess the performance of the broader macroeconomic environment around the world. For emerging nations like India, however, they serve an additional purpose: to assess the way the financial markets are likely to perform in the future.
By closely monitoring global economic developments and their implications, traders and investors can better anticipate market trends, manage risks and capitalise on investment opportunities in a timely manner.
