The relationship between the US and Indian stock markets is complex and evolving, but one thing is clear: The US market influences Indian equities. But the two markets don’t always move hand in hand at the same time.
The influence starts with foreign institutional investors (FIIs). Large investors who base their decisions on US markets are a major part of global trends. If there is volatility in the country and it is high, and if the same happens in the US, FIIs might pull their funds out of emerging markets like India and that pushes the Indian equities.
For instance, the Indian Volatility Index (VIX) is driven by the US market, and studies have shown that the overnight returns on India’s NSE Nifty are strongly correlated with the returns on indices such as Nasdaq and S&P 500.
There is a direct link between India’s economy and the US economy, especially in some sectors. Take, for example, the Indian IT firms that get a good chunk of revenue from US corporations. The global crude prices they are dependent on at times are influenced by the US market trends, just like oil companies in India.
US and Indian markets can also go in opposite directions. Take 2022 as an example: Between January and October, India’s Sensex and Nifty rose more than 2%, compared with a 19% fall for the S&P 500. Why? Let’s take a look at the reasons behind such divergences.
Key Reasons for Divergence
- Domestic Economy: FII outflows of ₹1.68 lakh crore in 2022 were a record, Indian markets were resilient, unlike in 2008, when such outflows led to a 55 per cent market drop.
- Retail Investors: Domestic participation has surged. According to a study, assets under Indian mutual funds were ₹7.20 lakh crore in 2012 and ₹38.42 lakh crore in 2022, a cushion against any global volatility.
- Market Maturity: In the last decade, the Indian market has matured with reforms and mature investor awareness. It has decoupled itself from global trends.
A Few Quick Insights
- Correlation: The US and Indian markets have, historically, been correlated, particularly with global crises, but not perfectly.
- Sector-Specific Impact: The US market trends for IT and energy sectors in India are more sensitive.
- 2022 Divergence: Indian indices were positive while US markets slipped, indicating the growing independence of India’s market.
Another important difference is growth expectations. Over the past decade, both markets have returned about the same (about 9.7 percent a year), but the Indian market, which trades at a P/E of 33 versus the Dow Jones’ 16, still has higher growth expectations.
But does the US market influence India? That’s all dependent on the context. With greater domestic participation and market maturity, the Indian markets are now more appropriately positioned to chart their own course.