Current Volatility in the Indian Stock Market – Local and Global Factors Driving the Swings

 

The Indian stock market has been showing extreme volatility
making investors both fearful and excited.

 This uncertainty can be attributed to
a mix of local and global factors .

1. Global
Factors Impacting Indian Stock Market Volatility

a) Oil Prices
and Geopolitical Risks

Geopolitical tensions caused by Russia-Ukraine war is still
affecting global supply chains, particularly for commodities like oil. Israel
Hamas conflict  is adding salt to the
cut. With crude oil prices hovering around $95 per
barrel in October 2024, India is feeling the pinch. Higher oil prices
lead to inflationary pressure, which impacts various sectors of the Indian
economy.

b) U.S. Federal
Reserve’s Interest Rates

The U.S. Federal Reserve has kept a firm stance on interest
rates, with the latest update in September 2024
maintaining rates between 5.25% and 5.50%, the highest levels since 2001. This
strong dollar environment has led to a steady outflow of funds from emerging
markets like India. In September alone, foreign portfolio investors (FPIs)
pulled out nearly ₹10,000 crore from Indian
equities, contributing to the stock market\’s volatility. However, US Fed has
cut interest rate by 0.50% on October 1, 2024, bringing the benchmark rate to a
range between 4.75% and 5.00%. The positive effect
of this action may show up in coming days globally including India.

c) Global Economic
Uncertainty

There’s growing concern over the global economy, particularly
with slowdowns in China and Europe. China’s GDP
growth for 2024 has been revised to around 4%-much
below double-digit growth . This slowdown affects global trade and demand for Indian
exports, especially in sectors like steel and chemicals.

2. Local
Factors Contributing to Volatility in the Indian Market

a) Inflation
and RBI’s Policy

Domestically, inflation remains a pressing issue. India’s inflation rate stood at 6.7% in September 2024, slightly down from August’s
spike but still higher than the comfort level of the Reserve Bank of India
(RBI). The central bank has chosen to keep the repo rate steady at 6.5%, but hinted that further action might be taken
if inflation doesn’t cool off soon. Rising food prices, particularly vegetables
have been a major contributor to this inflation.

b) India’s
Economic Growth

India’s economy is showing mixed signals. On one hand, GDP
growth is robust at 7.7% for Q2 2024, but
there are concerns about whether this momentum can continue given the
inflationary pressures and global slowdown. Certain sectors like automobiles and consumer
durables are showing signs of stress as rising interest rates make
borrowing costlier for consumers.

c) Political
Landscape – Upcoming Elections in States

In view of a coalition Government at centre and some
uncertainty for Ruling party in upcoming Assembly elections in some states seem
to have caused some nervousness among foreign investors .Historically, election
periods in India have caused increased market volatility as investors

3. Stock Market
Performance – What the Numbers Say

 

 Middle East and new derivative regulations introduced
by SEBI have caused deep decline in Indian indices during the last
couple of sessions. BSE Sensex plunged 3,883.4 points, or 4.53%, closing at
81,688.45, while the Nifty50 index dropped 1,164.35 points, or 4.44%, to settle
at 25,014.60.

4. Outlook for
the Indian Stock Market – Where Are We Heading?

The Indian stock market’s future is likely to be shaped by a
delicate balance of local and global factors. While Assembly elections, Middle
East tensions and SEBI new regulations could trigger short-term swings, the
market’s long-term potential remains intact thanks to India\’s growing middle
class, government spending on infrastructure, and the increasing digitalization
of the economy.

Conclusion

The current volatility in the Indian stock market is a
complex mix of global and local factors. From high oil prices to political
uncertainty ahead of the Assembly Election in Haryana, Maharashtra and Bihar
multiple elements are influencing market sentiment. While the road ahead may be
bumpy, staying informed and diversifying your portfolio can help navigate this
turbulent market environment. Moreover, since everybody including institutions
are fearful , we may recall the popular adage “ Be greedy when everybody else
is fearful and be fearful when everybody is greedy.”

But we must take a bottom up approach-i.e., stock specific approach
rather than a index specific while buying and selling.