Indian stock markets are, just like any other stock exchange, are vulnerable to a plethora of factors. Whether it is a significant development in a major company or an international crisis in the opposite corner of the world, investors are more than likely to judge to such events and then decide on their stock investments in the bourses. For instance, let us take a look at India’s benchmark stock market index – BSE SENSEX. The index started the year on a positive note, gaining as much as 2,000 points over the course of January. However, over the course of February and March, the index moved on to shed its recently made gains and then some more. Once again, this period of the bear run was followed by a sustained bullish trend over the course of the next few months. With millions of shares traded across a variety of sectors every single day, it can be quite difficult to pinpoint exact reasons as to the rise and fall of prices. However, it is possible to understand the behaviour of the Indian stock markets by looking at some of the key metrics below:
Interest Rate Hike:- The rise in interest rates is not directly related to the stock markets. In fact, it is the ripple effect that causes the markets to react whenever there is a hike in interest rates. This is because whenever a centralised banking authority such as the Federal Reserve or the Reserve Bank of India increases the interest rates, it becomes expensive for the financial institutions to borrow funds. To make up for this, these institutions increase the rates they charge their customers. Individuals may find themselves paying a higher mortgage rate or credit card bill, whereas big businesses will suffer in a more direct way. With higher rates of interest, companies may not be keen on paying that much interest on their loans. This translates into less business spending and consequently, no new ventures/expansions. In many cases, this may even mean cutbacks. All of these, in turn, is reflected in the company’s stock.
Oil Prices:- Many times, we have seen leading stock market analysts and news channels attribute the behaviour of the markets to volatility in oil prices. This makes sense to a certain extent – if the price of crude oil rises, then the consumers and businesses alike will be forced to spend more on petrol and diesel. In many cases, this will raise the input cost for businesses and thereby, affect the company’s earnings. However, contrary to popular belief, studies have suggested that there is no direct correlation between oil prices and stock markets. There are various reasons for this – for one, there are other factors which are in play here like interest rates, wages, industrial data, et cetera. All of these can very well offset the changes in oil prices. Secondly, with an abundance of data at disposal, corporations have become particularly adept at anticipating the movement of oil prices and accordingly, preparing for it. There are a handful of sectors in the Indian stock markets where oil prices make a direct impact – transportation and oil & refinery. Considering that India is a developing country with transportation and logistics playing a key role, it is only natural for investors to react to the news of a change in oil prices.
Company Performance:- This one is fairly simple to understand. If a company is performing well and is reporting excellent figures in its quarterly results, then investors are bound to invest in its shares. Conversely, if a company’s sales or profits plummet, then the shareholders will lose confidence and will want to take their investment elsewhere. Through the months of April to August, SENSEX and NIFTY made record gains. The two indices respectively crossed 38,000 and 11,000 mark, driven by a stellar performance in the FMCG and banking & finance sectors. For more information on nifty 100 indices you can click here. Many leading players in the two sectors recorded double-digit growth – a feat that boosted the morale of the investors.
Domestic Institutional Investors:- Domestic institutional investors are parties that invest in securities and other financial instruments of the country they are based in. Some of the popular examples are mutual funds houses, insurance companies, banks, pension houses, et cetera. While the decisions that these organisations make are determined by a whole range of factors, they do have the ability to move the Indian stock markets. For instance, mutual funds have become highly popular in India over the course of the last couple of years. It has seen a lot of traction over the course of the last year or so. With mutual funds houses pumping money into the markets, it is only natural for the prices to go up. A similar correlation can also be drawn with the insurance sector as well.
Trade Wars:- t is fair to say that much of 2018 has been dominated by the news of trade war between the United States and China. Things didn’t escalate much in the first quarter of the calendar year. However, it didn’t take long for the two countries to start imposing tariffs on each other’s’ imports. As of September 24, 2018, the US has implemented tariffs on a total of US $250 billion worth of Chinese products while China has implemented tariffs on products worth US $60 billion. On a grand scale, this has the potential to impact the rest of the world. The US companies which rely on Chinese imports and international trade may soon find their profits take a big hit. The effect of this is likely to be absorbed by the other companies as well, which are in business with the US firms. The very same thing has been predicted by the International Monetary Fund as well. In the report it released in October, it said that the global economy is now expected to grow at 3.7% – down by 0.2% from its previous forecast, citing trade wars and disruptions in trade policies. The markets haven’t reacted positively to such notions and consequently, benchmark indices like Dow Jones and SENSEX have taken a sharp hit.
Falling Rupee:- A falling rupee has also sent the Indian stock markets in a frenzy this year and this has mainly been driven by the actions of foreign investors. This is because, with a falling rupee, foreign investors get a lesser value for their stock holdings in India. In other words, the asset value of their investments reduce. Therefore, in a bid to prevent their losses, overseas investors go on a selling spree in the Indian markets and pull their investments out of the economy. The same trend was seen over the course of September and October. The rupee crossed the psychologically important mark of Rs.73 in early October and by that point, the SENSEX was down in the 34,000 region after reaching its record high at levels above 38,500.However, the Indian companies that earn in US dollar stand to benefit greatly from this. The reason for this is simple – with a falling rupee, they get more value for their dollar. Some of the best examples are the IT companies and pharmaceutical giants.
Final Thoughts:- The factors mentioned above have been few of the market movers in India. By studying these factors carefully and following global trends, it can be possible to turn the ongoing bear run into an advantage. However, it goes without saying that investors must exercise caution and research carefully before making any such decision.