GUIDES
GuidesUS StocksA Guide: How Inflation Affects US & Indian Stock Markets: Impact Explained & Know how to Navigate Volatility
LAST EDITED BY SHEFAALI BOPANA ON JUNE 18, 2025.
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.
Inflation is back in the news. From the US Federal Reserve's statements to India's rising food prices, headlines worldwide are buzzing. And markets? They're reacting. Stock indices are swinging, and investors are nervous.
But why does inflation cause such a stir? More importantly, how does it affect your investments?
This guide will help you understand inflation and how it works and impacts investments, especially in the US and Indian stock markets. You'll also learn what you can do as an investor during inflationary times.
Inflation means the general rise in prices over time.
If your favourite coffee cost ₹100 last year and now costs ₹110, that's inflation in action.
In investing terms, inflation eats into the real value of your money. Your ₹1,000 doesn't go as far as it used to.
The inflation rate tells us how fast prices are rising. It's usually given as a percentage increase over a year.
Most countries use the Consumer Price Index (CPI).
CPI tracks the prices of a standard basket of goods like food, clothes, transport, and rent. If the cost of this basket rises, CPI goes up, which means inflation is rising.
There are a few common reasons:
So yes, inflation happens when prices rise—but the reasons behind it can vary.
Inflation doesn't just affect your grocery bill. It ripples across the whole economy.
Inflation reduces what your money can buy.
You lose purchasing power if prices increase 6%, but your income doesn't. That's why savers often feel the pinch.
Central banks like the Indian Regulatory Authority or US Fed often raise interest rates to fight inflation. Higher rates mean borrowing becomes expensive — for people and businesses. That slows spending and cools inflation, but can also hit corporate profits and stock prices.
Mild inflation can be healthy. It signals a growing economy.
But high inflation? That's trouble. It slows consumption, increases costs, and can lead to job cuts.
On the other hand, too little inflation—or deflation—can also hurt growth. It causes people to delay spending, expecting prices to fall even more.
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:
Let's keep it simple:
High inflation often means economic overheating or crisis. Low inflation can mean weak demand and slow growth. The sweet spot is somewhere in between.
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 the Indian regulatory authority 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.
Inflation can affect the stock market in both good and bad ways. In the short term, higher prices might help companies earn more revenue. But if inflation stays high, it usually leads to rising costs—like raw materials and wages—which can hurt profit margins. It also tends to push up interest rates, which makes borrowing costlier and can drag down the value of growth stocks. In general, inflation brings more uncertainty and volatility to the market.
Inflation reduces the real value of money over time, which means your investment returns may not stretch as far. Fixed-income assets like bonds or savings accounts often lose value in real terms. Stocks might offer some protection, especially if companies can raise their prices, but markets tend to be choppy during inflationary periods. Real assets like real estate or commodities may perform better, though outcomes vary. A balanced portfolio is your best defense.
When inflation rises in the US, the Federal Reserve may hike interest rates. This can pull foreign investments out of emerging markets like India, as investors seek better returns in the US. These capital outflows can weaken the Rupee and create pressure on Indian stocks. Additionally, global trade and commodity prices, which are closely tied to US economic trends, also affect Indian companies.
Inflation causes the value of money to drop. Simply put, the same amount of money buys fewer goods and services than before. This decline in purchasing power makes your savings and income less effective over time.
When inflation rises sharply, central banks often raise interest rates to cool things down. Higher interest rates make loans more expensive, which reduces spending and borrowing. This helps slow down price increases, though it can also slow economic growth.
Yes, when it’s mild and steady. A small amount of inflation (usually 2–3%) encourages people to spend and invest rather than hoard cash. It also gives businesses confidence to grow. Problems mainly arise when inflation is too high or unpredictable.
