The Indian stock market is arguably one of the most dynamic and fast-evolving financial markets in the whole world. Since India is an emerging market, its economy as well as its stock market is intrinsically linked to global economic conditions. Such important factors that drive the Indian stock market are policies by the government, corporate earnings, and inflationary determinants. It is seen globally that many of such events have an impact on market performance worldwide. Geopolitical tensions, natural disasters, global economic crises, and international policy changes can send ripples through the Indian financial system. The know-how of how these events have an impact on the Indian stock market becomes crucial to every investor or market participant.
This blog will delve into the different global events that affect the Indian stock market and then be analyzed for the impacts on specific sectors affected. The table below summarizes such salient global events and their effects on the Indian stock market.
Key Global Events Impacting the Indian Stock Market
| Global Event | Impact on Indian Stock Market | Sectors Most Affected |
|---|---|---|
| Geopolitical Tensions | Lead to market volatility due to investor uncertainty. Investors tend to pull out capital when tensions rise. | Energy, Defense, IT, Banking |
| US Federal Reserve Decisions | US interest rate changes impact foreign investments in Indian markets. A rate hike in the US strengthens the dollar, pulling capital out of emerging markets. | Financials, Real Estate, Infrastructure |
| Global Recessions | When economies like the US or Europe face recessions, global growth slows, negatively impacting the Indian economy. | Export-Oriented Sectors, Automobiles, IT |
| Oil Price Fluctuations | Increased oil prices raise input costs, especially for India, which is a net importer. This affects inflation and can lead to higher interest rates. | Energy, Transportation, Airlines |
| Natural Disasters | Natural disasters (earthquakes, floods, etc.) in major economies can disrupt global supply chains, affecting Indian exports and imports. | Automobiles, Manufacturing, Textiles |
| Global Trade Agreements | Trade deals, tariffs, and sanctions can open up new markets or create barriers, which impacts industries that rely on international trade. | Exporting Industries, Agriculture, Automobiles |
| Currency Depreciation | A weaker rupee can make Indian exports cheaper and more competitive in international markets, but it increases the cost of imports. | IT, Export-Driven Sectors, Importers |
| Pandemics (e.g., COVID-19) | Global health crises create uncertainty, affecting supply chains, consumption, and production worldwide. Markets tend to fall sharply during such times. | Healthcare, Pharmaceuticals, Airlines, Retail |
1. Geopolitical Tensions
Markets in general and India, as a part of it, are affected due to these changes. As high rates are made available by the US Federal Reserve, capital outflows of hot money tend to even affect developing markets such as India. As interest rates are increased or kept high by the US, capital, at least, with regard to developing investments, will not flow much to these nations and will instead be drawn to the US.
By placing restrictions on the tendency for foreign investment, the government of India tries to insulate the nation from the damaging effects of fluctuations in foreign capital movement generated from changes in US monetary policy. When the US Federal Reserve modifies base rates in the economy, it may have either negative or positive effects due to a reduction or increase in interest rates, which restricts the investment capacity of major industries within the country to manage their financial budgets.
Geopolitical tensions such as wars, political instability, and international conflicts are an effect on the global market including directly the Indian stock market. For instance, if tensions rise in regions major oil-producing such as the Middle East, oil price rises globally. This inflation then ultimately leads to inflationary pressure wherein the purchasing power of the consumers is reduced by the inefficient trade, resulting in slow economic activity.
Thus, most importantly, geopolitical tensions create immense worry at the global level concerning such events. This leads to investors withdrawing investments from emerging markets like India-the most risky side compared to developed markets. Thus, inflow of foreign capital to such emerging economies reduces resulting in the downfall of the Indian stock market especially in sectors like IT, banking, and energy whose dependence is on foreign nationals.
The list of sectors affected by this are:
Energy Sector: Geopolitical instability of oil-producing nations will always increase oil prices, with the country’s economy feeling the pinch as it is the highest oil importer of such an economy.
IT and Banking: These sectors depend heavily on foreign institutional investment (FII). Any geopolitical tension causing some uncertainty leads to an outflow of capital.
Defense: Increased military expenditure during certain periods of geopolitical instability usually favors defense-related companies, thereby positively affecting the sector.
Decisions by US Federal Reserve: The Indian stock market is considerably affected by the monetary policy decisions taken by the US Federal Reserve. US changes in interest rates influence global liquidity; hence, they send ripples across capital flows into emerging markets in general and India as a part of it.
2. US Federal Reserve Decisions
The monetary decisions of the US Federal Reserve leave a remarkable on Indian stock market. It is the changes in US interest rates that introduce global liquidity and thereby have a bearing on capital flows into emerging economies such as India. Rising interest rates by the Federal Reserve thus lead to strengthening of the US dollar and with this a depletion of capital from emerging markets. The stronger dollar and high interest rates in America then bring about measurably inferior returns obtainable in countries like India, leading to a fall in stock prices.
Also, increased US interest rates give rise to lower increases in the costs of borrowing across the globe, including India, which means inflation will increase and household consumption will be negatively affected.
Affected Sectors:
Financial Sector: A rise in the interest rate is bound to impact negatively when it comes to borrowing costs, particularly on banks and financial institutions. It is actually found that higher rate increases would reduce further borrowing for credit thereby curtailing profitability of banks.
Real Estate and Infrastructure: Enhanced interest rates will tend to have better borrowing costs which delay infrastructure development, plus reduction in investment intended for the real estate sector.
3.Continental Meltdown:
Across continents, major economies fall slow, be it the United States of America, China, or even the Euro-zone as all these would have far-reaching effects on Indian stock market. When global growth slows, thereby diminishing the call for Indian exports. Areas where clear marks of signs turned-out would include automobiles, textiles, and IT services, relying on foreign demands.
As it generally appears, heads of the nations usually try to cut back on their risk exposure at such times as these global recessions. Thus reduced is the capital flow into emerging markets like India and bearish market sentiment thrives in the country.
Here are some of the sectors affected:
Export-Dominated Sectors: One obvious area of concern is how far the global recession would affect automobile and IT industries. In other words, a recession in the two super economies, i.e. the US and Europe, would lead to drop in demand and thereby reduce the volume of exports.
Pharmaceuticals: Pharmaceutical products do have some cover from local consumption, but a decline in the global demand for medical goods can be anticipated.
4. Volatile oil prices
Oil prices hit on the Indian economy, as well as the Indian stock market, directly. Most of the oil requirements are imported from foreign sources; hence, fluctuations in globally determined oil prices tend to affect inflation in the country, the trade balance, the fiscal deficit, and many parameters. When the prices of oil go up, it leads to an increase in input costs by the various industries, such as transportation, logistics, and manufacturing, which adversely affect the profitability of the companies.
Impacted Sectors:
Energy: A sharp rise in global oil prices favors to some extent energy companies that are basically engaged in oil exploration and production, a
5. Natural calamities are disasters
like earthquakes, tsunamis, floods, hurricanes, and so on, which can significantly disrupt the entire global supply chain and production processes of the goods and services. These natural calamities, especially in a country where they happen, will also significantly draw the attention of the Indian economy-related exports and imports, particularly for those dependent upon manufacturing and exports.
These natural calamities also hold the potential of creating some short-lived wandering volatility in the market as investors tend to act in an impulsive manner over the things uncertain because of any supply chain and production disruption.
Affecting Categories:
Manufacture and Export-related Sectors: Manufacturing and textile industries, being dependent on global supply chains, will have reduced supply, affecting production and thus sales.
Automobile: For automobile manufacturers, the supply chains disruption affects the ability to meet global demand.
6. International Trade Agreements:
Indian market faces effects of international trade agreements, as well as their tariffs and sanctions. If an Indian product is traded with a particular country, there are higher possibilities of expanding market share of such Indian products. If global trade is freed through the trade agreements, horizontal sectors like agriculture, the automobile industry, and pharmaceuticals would be benefited by such trade agreements. On the other hand, tariffs and trade restrictions from other countries, especially coming from two traditional giants like the US and China, would become a trade barrier for Indian exporters.
Sectors affected.
Exporting industries: Exporting industries like agriculture, textiles, and automobiles depend a lot on global markets so these changes would have adverse effects on them from alterations in global trade agreements.
7. Currency Depreciation
The Indian rupee becomes weak, and in spite of the fact that it would result in the crude dropping prices on price, indeed it would automatically be invalid on account of “other currencies and dollar value over all other currencies.” Well, for export-determined sections, a weakened Indian rupee would very well place Indian exports in a very reduced cost. By that, it will be able to completely compete in worldwide price markets. But on the other hand, the rupee depreciation will increase inflationary pressures in the economy, as the cost of imports would rise.
Sectors Affected:
IT and Export-Dominated Sectors: The depreciation promises even more development for expatriate revenues, in particular for the export-dominated sectors. Imports: The depreciation would also affect companies that import raw materials and finished goods.
8. Pandemics (e.g. COVID-19)
One event that shines the clearest spotlight on the way in which stock markets can be affected by global health crises is the effect of COVID-19. The event has brought global supply chains to a standstill, has changed entire behaviours in terms of consumer habits, and has caused a very sharp sell-off in markets while there was much speculation as to the economic and public health outcomes. As far as stock exchange volatility would be concerned, India would be the most sensitive stock exchange during those times, and have the most major impact on sectors engaged in healthcare, pharmaceuticals, airline, and retail businesses.
Affected Sectors
Healthcare and Pharmaceuticals: The high demand for medical products and services keeps the healthcare sector growing positively
Airlines and Retailers: The hardest-hit sectors under the pandemic lockdowns curtail normal spending by consumers.
Global events have a considerable impact on the Indian stock market. They determine investor sentiment, liquidity in the market, and the performance of different sectors. While some developments in the world may improve the fortune of one or other, the fate of another may see otherwise. The understanding of how these will affect the Indian market will enable investors to better strategize and manage their portfolios. Investors must track global news and events to be able to assess how these will affect their investments.