Indian stock market then and now
Let’s look back at where it all began.
The Indian stock market primarily trades through the Bombay Stock Exchange (BSE) and the National Stock Exchange(NSE). The BSE was established in the pre-independence era in the year 1875. The key index of the BSE, the BSE SENSEX valued at 100 in 1979 has increased over 350 times in 40 years and stands at over 35,000 points today1. The key index of the NSE, the NSE NIFTY 50 has also seen a volume increase from 1000 base points in 1995 to over 10,000 base points today2.
The history of the Indian stock market is testimony to the inherent volatility of stock market trading.
But what is it that contributes to each rise and fall of the stock market indices? Can stock market movements be predicted? Investors are always on the lookout for clues to predict stock market behaviour to capitalise and earn profits as well as to withdraw and cut losses.
While there may be many factors attributable for the stock market rise and fall, global market movements especially that of the US stock market often provides cues to the Indian stock market behaviour as well.
What do the statistics say?
The US stock markets close in the wee hours of the morning in India time. We have all noticed on several occasions, the BSE and NSE opening in the negative following a significant negative close in the US stock market.
If the annual key index values of both the New York Stock Exchange (NYSE) and the NSE are plotted from their respective inception till date, a clear pattern of the Indian stock markets following the movements of the US stock market emerges3.
Be it the ‘dot-com bubble’ in the late 1990s, the ensuing ‘dot-com crash’ post 2000 or the major US stock market crash of 2008 – all major US stock market incidents have also resulted in subsequent rise and fall in the Indian stock market indices.
Historical evidence is definitely testimony to the trendsetting nature of the US stock markets.
What drives the statistics?
What drives such impact? Is it pure economy driven factors or is there something more to it?
The US economy and its impact
Globalisation is at its peak today with constantly increasing levels of international trade. The US economy being a developed economy and also the world’s largest economy assumes a central role in determining the fate of several developing economies that may be dependent on it to some extent for trade. Similarly, the NYSE being the world’s largest stock exchange impacts the Indian stock markets.
US consumption outlook
US is the largest consumer of goods and services. India exports various sector goods and services to the US. An increased consumer demand in the US for goods and services provides impetus to the exporting Indian companies and can drive their stock prices up.
Similarly a drop in consumer demand triggered by US domestic market factors can cause a slide in prices of Indian companies’ dependant on the US for their exports.
US interest rates
Increase in interest rates in the US can tempt foreign investors to liquidate their Indian stock investments and invest in safer debt instruments in the US.
Change is US dollar valuation
Generally the valuation of the US dollar and the Indian stock market has an inversely proportionate relationship. In the global market, most commodities are valued in US dollar. An increase in the dollar valuation can drive up import costs and consequently lead to fall in share price of import dependant companies.
The US stock market and its affect on investor sentiment
But what has a more immediate and direct impact is the movement of the indices of the US stock market itself and the impact that has on investor sentiment
Global companies listing
Several large cap companies listed on the NSE are also listed in the US on the NASDAQ or NYSE. Tata Motors, Infosys, Wipro etc. to name a few. Any share price movement in any of these stocks in the US would most likely bring a corresponding change in their share prices in the BSE or NSE as well.
Major events in the US
Even political events and diplomatic ties effect can have an effect on the Indian stock market. Any change which may be indicative of future concern for an economic superpower like the US could get investors to feel the same may affect the Indian economy and stock market as well. This is more sentiment driven.
Impact on Investor sentiment
The individual as well as cumulative effect of these factors has a significant bearing on both domestic and international investor confidence in the stock market. When investors see a certain trend in the US market, they expect the similar trend to repeat itself in the Indian market as well. This effects their immediate investing decisions and accordingly the prices in the Indian stock market.
So apart from the direct economic and market factors that impact stock prices, it is the investor sentiment that has developed over the years which creates a ripple effect in the India stock market to any change in the US stock market
When the markets of an economic superpower like the US is perceived to be in trouble by the investing public, it translates into a perception that the market of a developing economy like India would also definitely feel its impact.
So we see most of the general Indian investing public today diligently tracking the US markets today. While India today is emerging as one of the fast growing markets of the world and is carving its own path, investor sentiment still, often continues to fall in line with the popular saying of ‘follow the leader’.