Investing in the Indian Stock market can be rewarding, but it’s crucial to understand the factors that can lead to a surge or decline. You have invested in stocks with the expectation that they will go up. However, achieving this is often challenging due to the various factors that influence stock prices. Let’s examine several factors that can influence stock prices in India.
Lok Sabha Election 2024 results: Lok Sabha elections shape the political and economic environment for the next five years. A stable coalition will boost investor confidence and control the market volatility or sell-offs. If the elected government is reform-oriented, then it will be committed to infrastructure development, privatization, and other fiscal discipline. Certain sectors that will be impacted are:
Infrastructure and capital goods will gain.
PSU stocks will surge in hopes of privatization.
The pharma segment will profit due to trade policies.
The IT sector will largely depend on its export income.
The market shows high volatility around the election results, as well as the implementation policies that will act as a market guide.
Global Market trends: You might consider the Global market trends having a direct impact on stock trading as the FII (Foreign Institutional Investors) adjust their India investments based on trade policies. The US Federal Reserve’s policies impact the Indian market because they encourage investors to take risks.
The global equity indices like US (Dow, Nasdaq) and Asian (Nikkei, Hang Seng).
The European indices will have a significant impact on Indian stock trading.
The relationship between India and Pakistan, along with the escalation of tensions, will impact certain sectors such as the Public Sector Undertakings (PSU) and the defense segment.
The trade deal between the US and the UK will impose tariffs and affect agricultural access in both countries.
RBI Monetary Policy: The RBI has had a strong and multi-layered impact on the stock trading effect in India.
A rate cut in interest usually leads to lower borrowing costs, leading to a rise in stock prices. An escalation in the interest rates leads to higher borrowing costs, and the stock price may fall.
RBI uses CRR (cash reserve ratio), SRR (statutory liquidity ratio), and open market operations to manage the money supply. High liquidity is positive for equities, while tight liquidity leads to less capital in the system and results in negative effects for equities.
There is a sectoral impact, such as banking, housing, real estate, and NBFC, which will benefit when the interest rates fall. Defensive sectors like pharma and FMCG will outperform on a tighter monetary policy.
FII/ DII Activity: The Foreign Institution activity/ Domestic Institution activity plays a huge role in shaping the India Stock trading. When FII invests heavily in Indian equities, the investors acquire confidence. The FII contributes to the daily trading volumes and increases the FII activity. The mutual funds and insurance companies inject liquidity but have longer investment plans. The FIIs can favor high capital-intensive sectors like banking, IT, and infrastructure. Some sustained FII interest will inflate valuations in the emerging sectors. Keeping an eye on the Asian Stock trading might be a profitable step, as they focus on the best-performing stocks.
Rupee-Dollar Exchange rate: The Foreign institutional investors have a huge role in the Indian Stock market. The rupee depreciation will reduce the returns of FIIs. This can lead to capital outflow and cause a fall in stock prices. When the rupee becomes stronger, there is an improvement in the stock prices. Export-oriented products like Pharma and IT benefit from a rupee slide as they receive a higher amount from exports. The import of Oil & Gas and Aviation will suffer from a rupee slide, as the stock valuation and margins will have a negative effect. India imports almost 80% of crude oil, and its price is affected by increased inflation. Higher rates are bearish for the stock market. The effects of rupee deflation led to
Higher inflation
FII outflow
Pressure on the import-heavy sectors
Crude Oil Price: India is a major oil-importing country, and a fluctuation will reflect in the stock trading in India.
Escalation in crude oil prices leads to higher inflation and transportation and manufacturing costs that lead to inflation. RBI will increase the interest rates, thereby curbing down borrowing and investment; this will pull down the stock prices.
A devalued rupee increases the cost of imports and decreases the outflow of Foreign Institutional Investment (FII), which in turn lessens the impact on the market.
Oil-dependent segments like paints, logistics, airlines and chemicals might suffer due to higher inputs. ONGC and Oil India will benefit from higher prices.
Rising oil prices lead to market volatility, and this leads investors to shift to safer assets.
Corporate Earnings: Corporate earnings have a direct effect on the stock market.
Profits lead to an escalation in the stock market price, while losses lead to a sharp decline in investor confidence.
Strong earnings from companies such as Infosys in the IT sector and Reliance in the energy sector can boost investor sentiment, which in turn can drive up indices and related stocks.
Earnings from large companies dominate the indices of the Sensex and the Nifty. The earnings report helps to reassess the valuation multiples, such as the P/E ratio.
The FIIs watch the Indian corporates closely, and strong earnings boost the market liquidity and sentiments.
Inflation Data: Inflation data can impact the stock market trading because of investor sentiment and corporate earnings expectations.
Inflation will lead the RBI to increase the interest rates. This will increase borrowing costs and slow economic growth. These changes will affect the stock market negatively.
Lower profit margins will drag down the stock market. Higher inflation reduces the purchasing power and directly affects the FMCG, retail, and automobile segments.
A higher consumer price index (CPI) leads the market to fall and reduces the price of stocks.
Geopolitical developments: Geopolitical developments will affect stock trading since there will be increased market volatility and uncertainty. If major oil supply countries get disrupted with supply, then this will lead to market volatility. Higher commodity prices will lead to raised costs for companies and impact stock market profits. Investors might reallocate funds from riskier markets. Inflation-driven conflicts might raise the rates and lead to pressure on stocks. Events like the India-Pakistan war and other political disturbances might cause the stock value to lower a bit.
Regulation & Tax policy change: Tax changes and regulation policy can directly influence the stock market by investor behavior, company profitability, and market sentiment. Higher corporate taxes reduce the tax burden and finally lower the stock prices. The higher capital gains taxes would discourage investment or maybe holding the stocks for a longer period. Having regulations on sectors like banking, energy and healthcare increases the cost of stocks and lowers the profit/stock valuation. Policy uncertainty can lead to greater market volatility.
Keeping these factors in mind could lead you to effective stock market trading. The Gold price is increasing steadily, and investing in it can lead to a blissful future. Stock trading dominates the economy, and keeping these factors in mind could protect your mindful investment on profit-making grounds.
Sweta Chakraborty is an Amazon author and SEO content writer. She contributes articles, blogs related to finance, stock market, cryptocurrency and real estates.