Relationship between the Stock Market and Dollar/Rupee
Over the past few days or months, equity markets, as well as the currency markets, are highly volatile. Stock markets moved up to 38,896 and back to 37,300 in last 1 month. If we notice the movement of Rupee for the same period, it is evident that when Dollar strengthens (or Rupee weakens); Stock market falls and vice versa. Does that mean the Stock market and Currency moves in correlation with each other? Well, that’s true. There is almost 0.5 co-relation between SENSEX and Rupee. That means almost 50% of the movements in stock exchanges can be related with the movements in Rupee.
This positive correlation can be because of the following reasons:
Common Economic Factors:
Stock Market, as well as Currency markets, are generally affected by some common economic factors. Like, global markets, government policies, trade deficits, foreign reserves, monetary policies of the government, etc. Changes in these factors affect both, the Stock market as well as the Rupee.
India is one of the fastest growing economies and many foreign investors invest in Indian stock markets to get the high returns. To invest in markets, FIIs need to convert dollars (or their foreign currency) into Rupees and Rupee strengthens on account of high demand. On the other hand, when FIIs start selling the shares, market falls. FIIs convert back the Rupees into Dollars (or their currency) and Rupee weakens.
Many external/global factors affect the stock market as well as currency markets like; Sentiments towards Asian markets or Oil prices etc. Rising oil prices adversely impact imports and deficit. Since India imports 80% of its oil needs, rising crude prices will weaken the currency as well as the economy.
IT Stocks and Rupee:
Many times share prices of IT companies and Rupee are negatively co-related. That means, when Rupee weakens, stock prices of these companies go up and vice-versa. This is because export-oriented IT companies earn foreign exchange or make profits outside India with an export of goods and services. On weak Rupee or strengthening Dollar, the profit expectations of IT companies increase because of the translation of profits at higher exchange rates. This moves up the stock prices of IT companies.
So, if you are a regular investor, tracking currency markets along with stock markets can provide you better insight on the performance of the market as a whole or performance of particular stocks. Keep investing and stay updated.
This article is written by CA Janhavi Phadnis. If you have any queries concerning the above article. Please write to us either in the comments section below or email us on email@example.com.
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