New Delhi. Every corner of the world is now interconnected – be it trade, investment or technology. In such a situation, when there is a stir in America’s economy or China’s growth slows down, its impact directly reaches the stock markets of India. Investor sentiment, foreign fund flows, currency movements and crude oil prices are all connected like a global web, where one movement can shake the entire system.
How is the world and India’s economy connected?
India is the fifth largest economy in the world and as an emerging market, it is a very attractive place for foreign investors. But this also means that India cannot remain completely isolated from global economic conditions. When the Federal Reserve in America increases interest rates, foreign investors move money out of emerging markets like India and start investing in safe American bonds. This causes a decline in the Indian stock market and weakens the rupee. In the opposite situation, when the global economy booms and interest rates remain low, then the flow of foreign funds into the Indian market increases. This increases the demand for shares, due to which indices like Sensex and Nifty go up.
Why the actions of America, Europe and China matter?
The condition of America’s economy decides the direction for the whole world. The fear of decline or recession in America’s stock markets spreads like a wave in emerging countries as well. Similarly, the energy crisis in Europe or the slowdown in production and exports in China also affects India. For example, if China’s demand decreases, crude oil and commodity prices fall. This gives some relief to India because our import bill is less. But on the other hand, due to interruption in the supply of cheap products from China, global inflation increases, the effect of which is also visible on India’s inflation and interest rates.
Important role of foreign investors
The role of Foreign Institutional Investors (FIIs) is very big in the direction of the Indian stock market. When risks increase at the global level, such as fear of recession or war, FIIs withdraw money from India. This increases selling in the stock market. For example, during the Russia-Ukraine war or the Covid pandemic, foreign investors had withdrawn money from Indian markets on a large scale. As a result, there was a sharp fall in both Sensex and Nifty. But when the situation improves and confidence in the global market returns, these investors again invest money in Indian stocks.
Crude oil and dollar also have a big impact
India imports about 85 percent of its energy needs. Therefore, international prices of crude oil directly impact our economy. If oil prices rise, imports become expensive, rupee weakens and inflation increases, which puts pressure on the market. At the same time, the fall in rupee against the dollar affects the earnings of foreign investors, due to which they reduce their investments.
What investors should understand
It is important for Indian investors not to depend only on domestic news. It is equally important to keep an eye on global market movements, Fed policy, dollar index, and crude oil trends because when there is a fear of global recession, shares of big companies also come under pressure, while defensive sectors like FMCG or Pharma remain stable. For long-term investors, global fluctuations can also become an opportunity. At times of decline, shares of strong companies are available at cheaper prices, which can give better returns in future.
When the world shakes, India also shakes.
Even though India is a strong and fast growing economy, it cannot remain completely isolated from the global economic environment. If there is a recession in the world, foreign investment decreases, if interest rates increase, the market falls and if there is a global boom, the Indian market also rises. Therefore, it can be said that every wave of global recession or boom definitely shakes the Indian stock market.
