Home » Are Indian markets decoupled from the USA? How Does US FED Rates Impact Indian Stock Market?

Are Indian markets decoupled from the USA? How Does US FED Rates Impact Indian Stock Market?

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Any market in the world is impacted by macroeconomic and microeconomic factors. It is the confluence of microeconomic factors like supply/demand, taxes, availability of capital and macroeconomic factors like the country’s economic growth, inflation, and interest rates. The Indian markets like any other also depend majorly on these factors along with others. In a highly globalized world, the micro and macroeconomic factors in one country can impact economies of other countries too. Let’s take a look at the Indian market and investor dynamic. 

Are Indian markets decoupled from the US markets? 

Let’s compare the US S&P 500 Top 50 index vs Indian S&P BSE Sensex 50 adapted to the USD. You can see that the correlation between these 2 indices is quite high. The index represents the broader market. 

One can also notice that there is a higher correlation between the 2 graphs in the last 3 years – notice how the markets have moved more in tandem from 2019 until now, the mid of 2022. 

Here the BSE Sensex 50 seems to be consolidating whereas the US S&P Top 50 is undergoing a sharp correction. 

Let’s compare DJIA vs Sensex too:

There is a decent correlation between Indian market and the US market across most indices. The correlation coefficient for 

  1. Sensex and DJIA is 0.59
  2. Sensex and NYSE Composite is 0.74

Both BSE Sensex and NYSE Composite are heavy on financials which is why the correlation between these indices is strong. Whereas the DJIA is heavy on technology stocks and the correlation is slightly lower. 

It is said “When the U.S. sneezes, the world catches a cold.” 

The US is the world’s largest economy, $24.88 trillion and trades products and services with most countries of the world. India is no exception to this and has deep trade relations with the US. In fact, US is India’s largest trading partner with trades between the 2 countries reaching $119.42 billion as of June 2022. To break this down further, India exports $76.11 billion worth products and services to the US and imports $43.31 billion. 

Financial environment changes in the US like Inflation, recession, unemployment, company earnings and wars cause a change in the demand and supply of certain goods and services. This impacts Indian markets. 2008 subprime crisis is a good example of how an economic collapse in the US impacted the Indian markets and indeed the entire world. 

The market sentiments in the US are also mirrored to a great extent by the market in India. 

There are some glaring differences too. 

  1. US markets are home to companies from around the world with large overseas markets. A US specific calamity may not affect all the US companies badly. Whereas in Indian markets, most of the listed companies are domestic companies which are impacted badly by India wide calamities. 
  2. The USD/INR difference means that every time the Rupee slips, the valuation of investments and companies in the Indian markets slides significantly as compared to the US counterparts. USD being a global currency does not have this disadvantage.
  3. The overall investor confidence in the US markets is higher than in the Indian markets. US is a developed economy with a high degree of resiliency in face of economic downturns. India on the other hand is an emerging economy with a lot to balance to keep the show running. 

Has this changed over the last few years/decades?

Indian domestic economy is getting stronger as the middle class in the country grows. This domestic demand ensures a certain level of insulation from the global economy due to better microeconomic conditions. The government is also implementing a lot of pro-growth policies like Make in India, PLI (Production Linked Incentives), Atmanirbhar Bharat and others which are contributing to reduced imports and encouraging local industry to manufacture and grow. 

Due to this strong local economy, people’s incomes are growing and the retail participation in the market is growing as well. Put this all together, India is better off than before, in terms of lower dependence on the US markets. Of course, in today’s globalized market, a complete isolation and independent market is just not possible. Any major shocks, calamities in the US or in the world, will impact the Indian markets adversely. 

Should Indian investors invest in India when US markets are down?

India is expected to be the fastest growing major economy in FY 2023. The economic recovery post pandemic is leading to good earnings growth for the companies. Like we saw above, despite strong bounce back, the gloomy global environment will impact India in more ways than one. The dollar index and the Indian markets have an inverse relationship. Today as the liquidity is being sucked back, and the dollar finds its way back to the US, the Indian Rupee has nowhere to go but down. This is expected to cause a correction in the markets. The global demand is also slowing down significantly which also spells slowdown for Indian export companies, mostly in technology and pharma sectors. 

With this background it is a good idea to opt in for geographical diversity and invest a portion of your portfolio in US markets. The US market is much larger, represents the world’s largest corporations and has a better performance record as compared to the Indian market. Although higher growth from Indian markets, the US markets will provide resilient performance in the long term and do warrant retail investments.