10 Key Factors Affecting the Indian Stock Market

Blog | Outlook

If anybody came to you today and said that they predicted the S&P BSE Sensex and the NSE Nifty 50 index would double over the next 18 months – they’re lying.
Back in 2020, when the 50-stock Nifty made an intraday low of 7,511, and the S&P BSE Sensex slumped to 25,638, most ‘experts’ called for doom. However, the market has defied all ‘predictions’ and how!
The Sensex crossed the 60,000 mark for the first time on September 24, 2021, while the Nifty is within touching distance of Mount 18K!
So, how did this happen? It definitely was not an overnight magic wand that suddenly turned bane to boon. Here are 10 factors that influenced the Indian Stock Market in most instances.

Fund Flows
One of the biggest reasons to influence the market, the movement on either side is largely determined by whether the funds are coming into the market or being pulled out. The first leg of the current rally was mainly driven by Foreign Institutional Investors or FIIs. The extent of foreign funds pouring money into Indian equities was such that starting November ‘20 until Mid-December ‘20 India's market received a foreign inflow of over ₹ 1 lakh crore! In 2021, before the second wave of pandemic, FIIs remained net buyers from January to March. Post March, while foreign investors turned net sellers, pulling out money on every rally, on the other hand Domestic Institutional Investors or DIIs have been driving the markets higher. In the five months starting April 2021, DIIs have invested close to ₹ 50,000 crore in India's equity markets. This tells you a lot about the significance of fund flows.

US Federal Reserve
Who can forget the famous Taper Tantrum of 2013 which triggered a spike in US Bond Yields and led to a massive correction in equity markets across the globe, including India. Ever since, a lot has been said about the Federal Reserve, its policies, and the impact it has on global markets. A ‘Dovish’ Fed keeps the markets happy and vice versa. The Indian markets witnessed a correction earlier this year too, when the bond yields spiked in the US, but it wasn't as sharp as 2013 and the rebound was equally swift.
The taper talk has resumed with speculation that the Fed will gradually start pulling out ‘easy money’ from the markets from November and complete the process by mid-2022. While it is yet to declare an official timeline, the Indian market seems to be better prepared from the lessons of 2013 as such talk has not had a significant impact on the mood of the markets.

Corporate Earnings
The experts who voice their opinions on air speak about the fact that earnings growth is a key parameter that needs to be looked at while picking a stock. While corporate earnings remained dull for the better part of the last few years, it saw a tremendous rebound in FY21. A low base, coupled with pent-up demand from the Indian consumer, saw most companies surpassing consensus estimates by a distance.
With one of the biggest criteria being met, investors were happily lapping up shares that were delivering on earnings and contributed further to the market upside.

Reserve Bank of India's Monetary Policy
The market also takes cues from how India's central bank reacts to its own macro indicators along with external factors. The Reserve Bank of India was swift to jump into action right from the onset of the pandemic. Whether it is announcing a moratorium on bank loans or additional measures during the second wave of pandemic. The RBI ensured that there was enough liquidity in supply during the tough times. The market appreciated that. While the markets do look forward to the bi-monthly monetary policy, it does react to the fine print as compared to just a change in the repo rates.

Global Markets
As the saying goes, 'What the US does, the world follows'. . While that did hold true for most parts of the pandemic and even before that, the Indian markets are slowly learning to disassociate themselves with the happenings in the US. The most glaring example is the month of September itself. While the benchmark S&P 500 is down 1% for the month, the Indian benchmark - the NSE Nifty 50 - has outperformed its US counterpart, gaining over 7% during the same period.
Of course, the US underperformance is courtesy of its own domestic factors, but the Indian markets have not toed the line so far.. However, there will be factors that will have a ripple effect everywhere. The Evergrande crisis is an example. Something that brewed in China led to a correction across the globe. Markets in the US fell, as did those in India. But, while the US markets grapple with their own factors, Indians have chosen to buy the dip and remain near record high levels.

Geopolitical Factors
Geopolitical factors also influence the markets. Whether it is the US-China trade tensions, or the border tensions with Pakistan and China, the markets do tend to react based on the implications it will have on the country as a whole. The markets witnessed a major correction during the Brexit vote, which resulted in nifty falling back to its previous low of 7927.

Union Budget
If this isn't a factor, then we don't know what is. Markets have their own ways of reacting to the Union budget speeches from Finance Ministers. For evidence, we can go back to the budget day speech of 1991 by then Finance Minister Dr. Manmohan Singh that resulted in a record rally on the Sensex, or the ‘dream budget’ of 1997 by P. Chidambaram, the markets have cheered speeches that have put money in the hands of investors.
Similarly, the 2021 budget day speech by Finance Minister Nirmala Sitharaman is a telling example. Both the Nifty and the Sensex registered their best budget-day gains in 24 years on February 1. Ahead of this year's budget, the markets were down for six days in a row. 60% of that decline was erased in a single session.

Stock-Specific Activities
News flow is also a key determinant of where the market is headed. Most of the Nifty 50 index is composed of financial stocks, any movement in either direction will determine where the market is headed. Of course, there are other heavyweights like Reliance Industries, which commands the highest weightage on the index, along with other stocks like TCS, Infosys, ITC, which are considered to be market heavyweights.
From its March 23, 2020, low of 7,511, the Nifty has risen 138%. If we glance at the list of top gainers, you will find the likes of Hindalco, Tata Steel, and other metal stocks. However, while Reliance Industries may not feature among the top 10 gainers, the appreciation in the stock price is enough to send the indices higher.

Bond Yields
Another factor that influences the Indian equity markets is how the 10-year bond yield behaves in the US. One of the key factors for the correction witnessed by Indian equities in March this year was the rise in the 10-year bond yields in the US, which rose to a 14-month high of 1.7%. Higher bond yields in the US would mean investors would choose to park their funds with better yield prospects and therefore pull money out of Indian equities.

Macro Factors
Lastly, inflation, GDP, and other macro factors are other factors that can influence the market direction. While they may not count as one of the biggest influencers, the market does look forward to positive commentary on India's GDP growth and a stable inflation trajectory. While there have been recent cuts to India's GDP growth estimates due to the second wave of Covid-19, the market was quick to price it in and shift focus to other factors like flows and corporate earnings.

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