How does the US market influence the Indian stock market?

Have you ever wondered how events in the US stock market ripple across the globe, impacting markets like India? It's often said, "When the US sneezes, the world catches a cold." This metaphor holds particularly true for the stock market.

Global incidents, such as the dot-com bubble, 9/11, the US subprime crisis, COVID-19, recent US economic challenges and geopolitical tensions like the Russia-Ukraine conflict and the Israel-Gaza crisis have all significantly impacted the Indian stock market.

Let’s explore the relationship between these two economic powerhouses, and understand how the US market’s ebbs and flows can dictate the tempo of the Indian stock market.

How the US market influences the world

The US market serves as a barometer for the global economy. Flagship bourses in the US like the Dow Jones Industrial Average, the S&P 500, the NASDAQ Composite, and bond yields, grab the attention of investors all over the world.

In terms of bond yields, the U.S. Treasury yields, particularly the 10-year Treasury note, are closely watched. The ups and downs of these indicators are powerful enough to trigger significant development in economies across the globe, India included.

How US markets impact the Indian economy

Trade partnerships: As India’s largest trading partner in 2022-2023, the US significantly impacts the Indian economy. The performance of the US market can forecast economic trends in India. For instance, if there’s a fear of recession in the US, Indian markets often prepare for potential volatility.

The role of the US dollar: The US dollar's strength is a critical global economic indicator. It's not just a currency but a reflection of the US economy's health. The movement of the DXY (US Dollar Index) is a key determinant of the position of the Indian rupee and has large-scale repercussions, not just for multinational companies but for the economy as a whole. Interestingly, there has been a noticeable surge in currency trading in the sub-continent after the advent of new-age online trade apps.

Breadth of economy: The US market is a front-runner in the global financial theatre given the fact that nine out of the world's ten largest companies are publicly listed there. The scope and the breadth of the US markets set the market tone for the world, including India.

Impact of tariffs: When the US decides to ramp up trade tariffs, it can hurt Indian companies that export goods there, leading to reduced profits for these businesses. This situation could result in a drop in stock market values in both countries, as investors react to the potential decrease in trade and earnings.

What is the Correlation with the Indian Stock Market?

Historically, the sync between the US and Indian stock markets was stronger, with correlation coefficients between 0.6 to 0.7. However, in recent years, this has dipped to between 0.4 and 0.5.

Source: Business Standard

The Decrease in Correlation

Looking at the graph, we see that both the Sensex and Dow Jones started at the same point, marked 100. By September 2022, the Sensex had slightly inched up to 100.94, showing a small gain. However, the Dow Jones had fallen to 86.19.

This means that, in recent times, Indian bourses have managed to retain their levels, whereas the US markets have plummeted sharply. Naturally, the correlation between the two markets has taken a beating.

Indian markets have been charting a path of their own, in contrast with the US markets. This is primarily driven by three principle factors, essentially —

Economic independence: The growth of India's GDP and corporate profits have become more self-sustaining, less influenced by the US market's beats.

Different economic ties: The US economy is in greater sync with other Western nations, following a different economic tune compared to India. Progressively, we are seeing that the Indian economy has been outgrowing the clout of the US markets.

Distinct market forces: In India, an emerging market, the tempo is set by local interest rates, currency exchange rates, and other factors like politics and law, which leads to a different dance altogether.

Potential upcoming economic impact of US decisions on India

The US Federal Reserve (Fed) meeting on December 13 maintained the federal fund rate at 5.25%-5.50%. Until recently, there had been an outflow of funds from Indian equities to the US bond market given the alluring returns, on offer, by the U.S 10-year benchmark treasury. However, with muted US inflation figures streaming in, strong market consensus is building up that the rate hike cycle is nearing completion. This has been no less than music for the US market bulls who have been keen on cashing in on India’s economic potential.

FIIs are major players in the Indian markets, and their investment decisions are often influenced by the performance and policies of the US market. Bullish trends in India can encourage FIIs to invest more in our markets, seeing it as an opportunity for growth.

Conversely, bearish trends or instability in the US can lead to a pullback, causing FII outflows from Indian markets.

Final thoughts

While the influence of the US market over global bourses is undeniable, one must concede that Indian markets are also starting to move independently.

Yogesh Kansal, Cofounder & CMO, Appreciate