Relationship between macroeconomic factors and Indian stock markets

The Russian-Ukraine war is in its 9th month which seemed most unexpected in the modern world. But sadly it is the reality. Although the war is concentrated between the two countries, the impact of the same is faced by the entire world. The world economies have been still reeling from the impact of the pandemic and the ongoing war has further aggravated the crisis. India is not left untouched by these macroeconomic factors and the immediate effect of the same is seen in stock markets. So what exactly are macroeconomic factors and what is their relationship with stock markets? The answers to these questions are discussed hereunder.   

What are macroeconomic factors?

Let us begin with the basic meaning of macroeconomic factors. Macroeconomic factors are the broad market factors that may be internal or external to a country as a whole but impact its economy and other important aspects like its stock markets. These factors can be in the form of manmade like war, recession, currency fluctuations, or even natural disasters like earthquakes, tsunamis, etc. The study of these factors and the extent of their impact is important to understand the trajectory of the economy and its key pillars like the stock market, major industries, impact on the GDP, etc.

How do they affect Indian stock markets?

Now that we know the basic meaning of macroeconomic factors, let us pick a few such factors and understand their impact or relationship with the Indian stock markets. 

• Inflation

Inflation is a word that is often heard in television debates and is a growing concern faced by many major and developed economies. Inflation is the reduction in the purchasing power of money or the erosion in the value of money over a period of time. When the inflation in the country increases, people are left with less disposable income. This results in lower investment opportunities for investors and therefore, they prefer safer investment options like PPF, Bonds, Sovereign Bonds, etc, that can provide stable and inflation-proof returns. The direct impact of the same is a drop in demand for stocks and with extension a fall in the stock markets in general. Therefore, inflation and stock markets are known to have an inverse relationship.

• Crude Oil 

Crude oil is one of the most crucial commodities in the national and global markets. It is also one of the biggest imports of our country draining valuable foreign reserves. Among the many impacts of the ongoing war is the increase in crude oil prices globally. An increase in crude oil prices is a major reason for the increase in costs across different sectors that are directly or indirectly. This impacts the bottom line of companies trickling down to the stock prices. Therefore, crude oil and stock markets appear to have an inverse relationship. 

• Exchange Rates

The currency of a country is one of its biggest assets from which it can assert its dominance over other countries. Along similar lines, Dollar is one of the strongest assets of the US. The start of the Russian-Ukraine war saw a deeper impact on the currencies worldwide when major names in this game (Euro, Japanese Yen, Sterling Pound, Chinese Yuan) started tumbling. The Indian Rupee is not unaffected, however, most experts across the world agree that the INR has been able to hold its ground for the most part and is faring far better as compared to many developed countries. This does not change the fact that the INR has seen new pits and may see them further. The direct impact of exchange rate fluctuations is on the stock markets as whenever the dollar rate increases, it sees a sharp decline in the stock markets too. The FIIs prefer to invest in their home markets and therefore pull out of the Indian stock markets pushing them toward a sharp decline. 

• GDP 

The GDP of a country is the measure of the growth of the economy. It is measured in absolute terms or in terms of percentage increase or decrease which is the more popularly accepted measure. The GDP of a country is determined to be the net value of all goods and services produced in the country and exported. When the GDP results are announced quarterly or annually, stock markets are among the first to react. The stock markets see a sharp decline when the GDP results show a negative performance of the economy due to a loss of confidence in investors (retail and institutional). Conversely, when the GDP results are quite positive, it creates a bullish atmosphere in the stock markets indicating a redirect relationship between the two. 

• Gold Prices

Gold is one of the safest assets and is very dear, especially to Indians. Gold prices tend to increase whenever there is a fall in the stock markets. In a volatile market, gold is considered to be a safer investment option as compared to stock markets. Furthermore, with dynamic investment options like Gold ETFs, Gold mutual Funds, and Sovereign Gold Bonds available today, investors can invest in gold without bearing the risks of investing in the metal in the traditional manner. This adds to the demand for gold in a bearish market indicating an inverse relationship between gold prices and stock markets. 

• Interest Rates

An increase in interest rates is one of the most common ways to combat rising inflation. Most countries have currently hiked their interest rates including India. The increase in interest rates although can help control inflation, it has a negative impact on the stock markets. Globally, when the Fed rates are increased, foreign investors find US treasuries to be more lucrative which prompts them to pull out of Indian markets and invest there. Similarly, within the country, an increase in the RBI rates leads to an increase in the EMI costs reducing the available resources to invest in stock markets. There may also be cases when investments are liquidated to meet the additional cost of borrowings. This eventually reduces the demand for stocks and creates a bearish mood indicating an inverse relationship between the interest rates and stock markets.

Conclusion

Macroeconomic factors are situations that are often not in control of any one person or economy. Therefore, the country has to take suitable measures to combat the impact of the same on stock markets and other pillars of the economy. Some other macroeconomic factors that may have an impact on stock markets include company results, any political changes or policy changes relating to a particular industry or sector as a whole, etc. the impact of these factors on stock markets is usually immediate, however, long term investors should particularly note that in the long term equity markets are known to provide the highest returns than any other investment option. Hope you got a fair idea of macroeconomic factors and how they impact our stock markets. Let us know if you want to know more about these factors in detail.