Today’s article is to analyze the impact of the Dollar on the Indian Stock Market. If you understand the correlation between foreign currencies like the dollar, rupee, and the Indian stock market, it will be easier for you to trade and monitor the market.
Rupee vs Dollar and the Stock Market
First, Let’s come to the relationship between Rupee and the Stock market. There is a positive correlation between Indian Rupee and the stock market. The relation forms a positive cycle, an important microeconomic factor of all time. Now, move on to the relationship between the dollar and the stock market which is always in an inverse relationship. The article will cover the details of it and help you to identify the relationship well.
How Does the Dollar Affect the Indian Stock Market?
I have already stated above that there is an inverse relationship between the dollar and the stock market. If you monitor the past 10 years’ data that shows both the Nifty index and USD movements, they share a strong opposite relationship. If USD goes up, the Nifty depreciates, and vice-versa.
The Dollar Index
However, the impact of the dollar index is more noticeable in the short term. When the dollar index falls, FIIs (Foreign Institutional Investors) invest more in Indian stocks as they expect higher dollar returns and when it rises, they invest less as the return is low. Technical analysts can easily compare the dollar index with NIFTY 50 in order to find out the next support or resistance level and the present scenario of the market. As a result of the rising dollar value, the overall NIFTY get to suffer.
The Sectoral Impact of the Dollar Index
There are few sectors in the Indian stock market that suffer a lot in comparison to other sectors. A rise in the dollar index is likely to cause a drop in share prices of companies in cyclical sectors (domestic consumption-oriented sectors, e.g. Banking, Automobiles, Oil and Gas, Capital Goods, Metals, etc).
Therefore If you are a regular investor, you can get benefits from tracking or comparing the dollar index with the Nifty index in technical analysis.
Comparison of the Nifty Index vs the Dollar Index
I am providing a chart below. From the given chart you will be able to compare NIFTY 50 with the USD index. This COMPARE feature is only available in Zerodha Kite.
In the above chart, it is clearly visible that the two lines build up an inverse relationship. The white line considers the NIFTY index while the yellow line is the USD index. There is an immense gap between the two lines here. When NIFTY goes up the USD index will certainly go down and vice versa.
Analysis of Nifty Based on the Dollar Index
According to today’s market rate, NIFTY stands at 10,805.15 while USD is at 68.12. Based on many of the well-known technical analysts’ research, if the USD value goes down or falls below 67, the NIFTY will surely rise to 11,000. They consider 67 as the support level and after the support level is broken, NIFTY will rise. Their second assumption is if USD falls at 65 an “M” pattern may appear, called the double top pattern.
The Effect of the RBI Policy Meet on the Indian Stock Market
Recently we noticed that the RBI policy meeting is causing problems for the rupee. The rupee has slipped from its near-one-month high to close at 67.11 against the US dollar and the dip was because of the demand for the dollar from banks and importers.
FAQ
The exchange rate of a currency affects how people view stocks and their corresponding companies. If the value of the US Dollar rises, stocks usually decline as investors are discouraged to purchase due to cost increases. Conversely, when the US Dollar falls in value, stocks tend to rise since foreign trading costs become more affordable.
When there’s an increase in demand for products priced in USD (the U.S. Dollar) then it causes appreciation and strengthens its relative price compared with other currencies like Indian Rupee which makes international investments more expensive, decreasing stock prices and leading to a bearish market environment.
When there’s a decrease in demand for products priced in USD then it weakens against other currencies like Indian Rupee resulting in cheaper overseas buying options which lead investors towards higher-return markets as well as increased portfolio diversification opportunities pushing up stock prices creating a bullish sentiment on markets worldwide.
Yes! It is likely that any economic instability or recession brought about by developments outside India will have some effect on our own economy – including fluctuations within our local Stock Markets from domestic and international traders alike who may choose not to buy shares or invest funds during unstable periods abroad.
Conclusion
In conclusion, we have understood the impact of the dollar on Nifty and the Indian stock market as a whole. Let’s hope for the best and expect a depreciation of the USD so that the stock market gets a scope to rise. After breaking the next support level at 67, we can expect the stock market to race to new highs once again.