The Co-Relation Between Indian Markets & Wall Street

Investing in equities feels like walking on thin ice right now. Both Indian markets and Wall Street are bleeding red. Volatility spikes every day, and uncertainty clouds every decision.

But here's what puzzles many investors: when the Dow Jones crashes 1,000 points overnight, why does the Sensex open with massive cuts the next morning? What invisible thread connects these two giant markets separated by oceans?

The numbers tell a stark story. The Dow Jones recorded 11 negative weekly returns between April and June. The Sensex wasn't far behind, posting negative returns in eight of 12 trading weeks during the same period.

This connection isn't a coincidence. It's a complex web of financial relationships that can significantly impact your investment portfolio.

Why Indian markets dance to Wall Street's tune

Think of global markets as a giant orchestra. When Wall Street plays a sour note, the music across the world goes off-key. The stock performance of Indian markets directly mirrors this phenomenon.

Several factors create this synchronization:

Economic interdependence: The US economy drives global trade. When American consumers spend less, Indian exporters feel the pinch immediately.

Currency fluctuations: A weak dollar makes Indian exports cheaper but also affects foreign investment flows.

Commodity prices: Oil, gold, and other commodities trade in dollars. Price changes ripple through Indian market indices instantly.

Foreign fund outflows: the domino effect

Foreign institutional investors hold the puppet strings of Indian markets today. Their current stake in key NSE 500 stocks sits at 19.9%, down from a peak of 21.4%.

This decline isn't just numbers on a screen. It translates to real money flowing out of Indian markets' stock exchanges.

When Wall Street stumbles, foreign investors panic. They pull money from emerging markets like India to cover losses back home. This creates a vicious cycle:

• Foreign funds sell Indian stocks
• Stock prices drop across Indian market indices
• More investors panic and sell
• Prices fall further

Both Sensex and Nifty have dropped roughly 10% year-to-date, largely due to this outflow pattern.

Example: In 2008, when Lehman Brothers collapsed, foreign investors pulled $12 billion from Indian markets in just three months. The Sensex crashed from 21,000 to 8,000 points.

Recession fears: when America sneezes, India catches a cold

Any slowdown in the US sends shockwaves through the global economy. Experts predict a US recession within the next 12-24 months, and Indian markets are already pricing in this risk.

Here's why a US recession hits Indian markets' stock performance so hard:

Services sector vulnerability: India's services industry contributes 52% to GDP. This includes IT, BPO, and KPO industries that depend heavily on US clients.

Tech giants at risk: Indian technology majors like Infosys, TCS, and Wipro generate significant revenue from North America. A US slowdown means fewer deals, lower earnings, and falling stock prices.

Capital access problems: During recessions, accessing capital becomes expensive. Indian companies struggle to fund expansion or enter new markets.

Reduced global demand: When Americans spend less, demand for Indian goods and services drops across the board.

Real-world impact: During the 2008 recession, Indian IT stocks lost 60% of their value. TCS stock fell from Rs 1,200 to Rs 400 in just six months.

Presidential elections: political uncertainty creates market chaos

US presidential elections inject massive volatility into global markets. Indian markets have a peculiar relationship with these elections.

Historical data shows India's Sensex drops 2.1% on average in the five trading sessions following the last five US presidential elections.

Why do Indian markets react so strongly to American politics?

Policy uncertainty: New administrations often change trade policies, visa rules, and tax structures that affect Indian companies.

Sector-specific impacts: Drugmakers and software exporters feel the heat most. These industries derive large portions of revenue from the US market.

Currency volatility: Election outcomes affect dollar strength, which impacts the Indian rupee and trade balances.

Investor sentiment: Global investors become cautious during transition periods, reducing investment flows to emerging markets.

The 2016 Trump election provides a perfect example. Indian pharmaceutical stocks crashed 15% in two days due to fears about drug pricing policies and FDA regulations.

The Federal Reserve: the puppet master of global markets

The Federal Reserve's decisions ripple through every corner of the global financial system. Indian markets today react instantly to Fed announcements.

The 2013 taper tantrum: When the Fed hinted at reducing bond purchases, India witnessed portfolio outflows worth $1.6 billion between May and August. The rupee crashed to historic lows.

Recent aggressive moves: The Fed's 75 basis point hike in 2022 was the most aggressive since 1994. This forced India's Reserve Bank to act defensively.

RBI's response: To prevent massive fund outflows, RBI made an out-of-policy rate hike of 40 basis points in May, followed by another 50 basis points in June.

The strategy worked. Indian markets showed more resilience compared to 2013. The Sensex fell only 5% since May, matching the Dow Jones' 6% decline.

Wall Street of wolf mentality: speculation drives correlation

The "Wall Street of wolves" mentality often amplifies market movements. When fear grips Wall Street, it spreads like wildfire to emerging markets.

Algorithmic trading makes this correlation stronger. Computer programs react to US market movements within milliseconds, automatically selling Indian stocks when Wall Street falls.

This creates an artificial correlation that doesn't always reflect economic fundamentals.

Indian market gold rate: the haven connection

During market turmoil, investors flee to gold. The indian market gold rate often spikes when both Wall Street and Indian markets crash together.

Gold serves as a hedge against market volatility. When stock markets fall, gold demand rises, pushing prices higher across global markets.

This pattern repeats during every major market correction, making gold an important indicator of investor sentiment.

Sector-wise impact analysis

Different sectors show varying degrees of correlation with Wall Street:

Information Technology: Highest correlation (0.8-0.9). These companies depend on US clients for 60-70% of revenue.

Pharmaceuticals: Strong correlation (0.7-0.8). The US market accounts for 40% of Indian pharma exports.

Banking: Moderate correlation (0.5-0.6). Foreign investment and global economic conditions affect lending and growth.

Consumer goods: Lower correlation (0.3-0.4). Domestic demand provides some insulation from global shocks.

Infrastructure: Lowest correlation (0.2-0.3). Government spending and local demand drive these stocks.

Ready to own a piece of the world’s biggest brands?

• Invest in 4,000+ US stocks & ETFs
• Fractional investing
• Zero account opening fees
• Secure and seamless

Start with just $1

Start investing in just 2 minutes!

P.S. No hidden fees or spam, just a smarter way to invest globally!

Build your global portfolio.

Invest in companies you love, like Apple and Tesla.

Track, manage, and grow your investments.

The diversification paradox

Here's the investment paradox: while the correlation between Indian markets and Wall Street creates challenges, it also offers opportunities.

Smart investors can use this correlation to their advantage:

Timing entries: Buy Indian stocks when Wall Street oversells due to local US issues that don't affect India.

Sector rotation: Move between high-correlation and low-correlation sectors based on global conditions.

Currency hedging: Use correlation patterns to hedge currency risks in international portfolios.

Contrarian opportunities: When correlation breaks down temporarily, savvy investors can find bargains.

Looking ahead: managing correlation risks

Understanding the correlation between Indian markets and Wall Street helps build better investment strategies.

Diversification remains key: Spread investments across sectors with different correlation levels to Wall Street.

Stay informed: Track US economic indicators, Fed policies, and political developments that affect global markets.

Think long-term: Short-term correlations often don't reflect the long-term fundamentals of Indian companies.

Use correlation strategically: Instead of fighting it, use correlation patterns to time entries and exits better.

The relationship between Indian markets and Wall Street will continue evolving. As India's domestic economy grows stronger, this correlation may weaken over time. However, in today's interconnected world, no market operates in isolation.

Both Wall Street and Dalal Street rank among the world's largest stock exchanges. Their impact on each other remains significant, but the lesser the correlation between the two, the greater the probability of building a truly diversified portfolio. Understanding this dynamic gives investors a crucial edge in navigating today's volatile markets.

Frequently asked questions about stock market?

1) Does the US stock market affect the Indian stock market?

Yes, the US stock market does affect the Indian stock market. Global financial markets are interconnected; major US policy changes, economic news, and market movements—especially in indices like the Dow Jones and Nasdaq—impact foreign investment flows, currency rates, and investor sentiment in India, often causing volatility or directional moves in the Indian markets.

2) Who owns 90% of the stock market?

About 90% of the US stock market wealth is owned by the richest 10% of households, with the top 1% alone holding around 50%.

3) What is the relationship between Dow Jones and NIFTY?

There is a moderate positive correlation between the Dow Jones (US) and NIFTY (India), meaning they often move in the same direction, but not strongly so. The correlation coefficient has historically ranged from about 0.1 to 0.36, indicating that while US market movements can influence NIFTY, the relationship is not very strong and allows for diversification.

4) What is the relationship between Nasdaq and NIFTY?

NIFTY and Nasdaq are not directly dependent, but global trends in Nasdaq can influence NIFTY, especially via investor sentiment and flows. Studies show no long-term equilibrium (cointegration), but short-term movements in Nasdaq can affect NIFTY, particularly in the technology sector. There is some evidence of unidirectional causality from Nasdaq to NIFTY, meaning Nasdaq movements can influence NIFTY, but not the other way around.

Disclaimer: Information is for guidance only, not financial advice. Consult a professional before making investment decisions.