How does Interest Rate Affect the Indian Stock Market?
Impact of Inflation on the Indian Stock Market
The interest rate decision is taken by the Central Bank (US= FED, India = RBI) of the particular country.
If the economy of the country performing well and ease in Inflation then generally Central Bank raises the Interest Rate and this is taken as positive or bullish for Currency of the country.
If the economy of the country shows slow or negative growth and an increase in Inflation then generally Central Bank reduces the Interest Rate and this is taken as negative or bearish for Currency of the country.
For the short term point of view Interest Rate Decision is an important factor to decide the valuation of the currency.
Indicators That Impact India Stock Market
A higher than expected reading should be taken as positive or bullish for the Currency of the particular country, while a lower than expected reading should be taken as negative or bearish.
Impact of Inflation on the Indian Forex Market
If the RBI increases the interest rate or repo rate, then it is positive or bullish for the Indian currency (INR) and it will gain against other currencies like USD, EUR, GBP, etc. or vice versa.
An increase in the Interest rate by RBI is bearish for the Indian Stock Market as it raises borrowing costs, hurting corporate earnings. And they make other investments more competitive.
Impact of Interest Rate Decision taken by the United States Federal Reserve Bank on Indian Equity and Commodity Market:
1) United States Federal Reserve (FED) Interest Rate Decision:
If the US FED increases the interest rate or repo rate:
Indian Equity Market: Bearish
When the Fed increases the federal funds rate, it does not directly affect the stock market itself. But higher rates raise borrowing costs, hurting corporate earnings and they make other investments more competitive.
As a result of the US Stock market show downtrend and Indian stock market also takes it as a negative
Indian Commodity Market = Bearish
Fed rate hike increases the value of a USD. As a result, the dollar gets stronger.
As we already know the US dollar Index and Commodity market are inversely related so, it is bearish for COMEX as well as Indian Commodity Market, especially for gold and silver.
Inflation Vs Gold Chart
In the above chart, you can clearly see the impact of the Fed rate hike on Gold in the COMEX market.
On 21st March 2018 US FED increases Interest Rate from 1.50% to 1.75%. Generally, the commodity market shows downtrend a few days before the rate hike. You can clearly see in the above chart that Gold was in downtrend from 13 March to 21 March 2018. After the rate hike on 21st March 2018, the gold changes the trend and shifted to the upward trend.
Similarly, Silver and most of the base metals in the Indian market also follows a similar pattern.
Indian Forex Market = Bearish
Fed rate hike increases the value of a USD. Higher US interest rates generally attract foreign Investors increasing the demand of USD. As a result, the dollar gets stronger against the Indian Currency (INR). USDINR shows an uptrend.
If the US FED decreases the interest rate or repo rate:
Indian Equity Market: Bullish
When the US Fed decreases the federal funds rate, it does not show a direct impact on the US stock market itself. But lower rates decrease borrowing costs, increasing corporate earnings and they make other investments more attractive
As a result, the US Stock market show uptrend and Indian stock market also take it as a positive.
Indian Commodity Market = Bullish
Fed rate cut decreases the value of a USD. As a result, the dollar gets weaker.
As we already know the US dollar Index and Commodity market are inversely related so, it is bullish for COMEX as well as Indian Commodity Market, especially for gold and silver.
Indian Forex Market = Bullish
Fed rate cut decreases the value of a USD. Lower US interest rates generally unattractive for foreign Investors as it decreases the value of USD. As a result, the dollar gets weaker against Indian Currency (INR). USDINR shows a downtrend.
Note: – Interest Rate Decision shows the only short-term impact on Equity, commodity and Forex Market
I have a lot of other things that also need to be considered and those are something that I will cover in my next post.
I believe this strategy will surely help you to make money from online trading.
If you want to add some other parameters that make this theory more profitable, then please comments below. Your views and suggestion are always welcome.