Are you planning to invest in the stock market? If so, understanding the impact of inflation on the US stock market and how US inflation data impact on Indian stock market is crucial. Inflation is a dreaded word in the stock market. It increases the prices of daily commodities & also affects the earnings and the purchasing power of the public. As per May 2023, the rate of inflation is 4.25% in India and 4% in the US.
How does this impact the Indian and US stock market? Read on.
Despite the geographical diversification, the Indian and US stock markets operate in close conjunction due to the numerous tech giants, like Infosys and Wipro, being enlisted in both markets. As a result, many investors holding company shares in these markets may face similar ups and downs. The rising Federal Reserve hikes impact both the US share market and the Indian stock market adversely. After all, the Indian stock market cannot function independently and remain unharmed when global markets suffer. Besides the US share market, the US dollar is vital as a global currency.
If the dollar weakens, the INR appreciates, fetching better returns for foreign investors in the Indian equity market. This promotes more foreign portfolio investment into the market.
India is one of the largest crude oil importers, primarily traded in US dollars. So, any change in the dollar index impacts the Indian economy directly, making the commodities more expensive.
A high dollar index strengthens the dollar while the INR depreciates, making imports more expensive. Indian companies that outsource or export can benefit from the appreciation.
Equity investors must have patience if they want greater returns from the stock market. That being said, the volatility rising from the impact of US inflation on the Indian stock market can be tackled by keeping a few things in mind:
In conclusion, understanding the impact of inflation on the US and Indian stock markets is essential for investors. The close connection between these markets, influenced by tech giants and global factors, means that changes in US inflation rates can affect the Indian stock market. Factors such as currency exchange rates and commodity prices play a significant role in this relationship. To navigate market volatility, investors can diversify their portfolios, adopt risk-averse strategies, stay informed about inflation rates and market trends, and maintain a long-term perspective on investment returns.
A calculated investing strategy can keep you afloat amidst the volatility due to the inflation impact on the Indian stock market. However, if you are not confident enough to pick stocks and diversify the portfolio for better risk-adjusted returns, it is advisable to seek professional guidance. Turn to Fi Money, where epiFi Wealth, a Registered Investment Advisor (RIA) under the Securities and Exchange Board of India (SEBI), provides access to over 900 mutual funds. Want to dabble in the US Stocks market instead? Fi does that too — that too with zero commissions.
Yes, rising inflation can cause the following factors that impact stock prices:
Central banks like RBI may increase interest rates on loans and deposits in a high inflation scenario, reducing borrowing. This encourages people to invest in fixed-income assets, resulting in less money flowing into the equity market and reducing liquidity.
To counter any volatility in the Indian or US stock market during inflation, calculate the inflation-adjusted real return and the investment horizon. You can calculate this from the formula below:
Inflation-adjusted return = (1 + Stock Return) / (1 + Inflation) – 1
So, if you have bought Rs. 100 of stocks and predict a 23% return based on past performance, and the current inflation is 6%, then your return would be:
(1+.23) / (1+.06)-1 = (1.23/1.06)-1= 16 percent
This will give you an idea of adjusting your portfolio and staying consistent with realistic expectations from your investments.
Inflation impacts the Indian stock market in the following ways:
The decision to buy stocks during inflation depends on individual circumstances and investment goals. While inflation can impact stock prices, some investors view stocks as a potential hedge against inflation due to their potential for long-term growth and returns. It's advisable to carefully assess market conditions, conduct thorough research, and consider consulting with a financial advisor before making investment decisions.