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Effect of Dollar Index on Indian Stock Market

by Mohamed Ali
Stock Market

This article will give you complete information on the effect of the dollar index on Indian stock market. We will also provide answers to several questions raised online regarding this topic as follows;

How does the Dollar index affect the Indian stock market?

What happens when Dollar index increases?

What happens when Dollar index falls?

What does Dollar index indicate?

Before we delve into the effect of dollar index on Indian stock market, let us briefly talk about the trading behavior in the Indian stock market and also explain what the United States dollar index means.

An Introduction to Indian Stock Market

Trading in the Indian stock market usually happens on the National Stock Exchange  (NSE), and Bombay Stock Exchange (BSE). In terms of volume, the NSE is the largest stock market, while the BSE is the older. Both exchanges have similarities in terms of market cap, market efficiency, innovation, and competition for order flow which leads to reduced costs.

Buyers and sellers on these exchanges remain anonymous because the entire trading process is order-driven and no market makers, investors’ market orders are matched with best limit orders automatically.

What is US dollar index?

The U.S. dollar index is an index of the dollar against a basket of other foreign currency has an impact in the Indian stock market.

The U.S. dollar index consists of other currencies; British pound, Euro, Japanese Yen, Swedish Krona, Swiss Franc, and Canadian dollar. Also, in Nigeria the dollar to naira black market today is very unstable. The dollar index is a very important tool for investors and traders in the global foreign exchange market.

What does Dollar index indicate?

As stated above, the U.S. dollar index is an important tool for both Indian and foreign investors. The value of the index indicates the value of the United States dollar in global market. When the dollar index rises, it indicates that the value or rate of the United States dollar against other countries’ currencies has appreciated, when the dollar index falls, it shows that the rate of the U.S. dollar has depreciated against other countries’ currencies.

How does the Dollar index affect the Indian stock market?

Though the Indian rupee is not among the countries in the dollar index market, any movement in the dollar index affects the Indian rupee as well. The flow of foreign fund into Indian equities is affected by either the increase or decrease of the rupee against the dollar. The profitability of Indian companies either earning huge revenues in dollars or importing vital materials are affected by the rise or fall of the United States dollar.

Any change in the dollar index also affects the dollar-denominated corporate debt and commodities.

The Indian rupee increases against the U.S. dollar when the dollar index weakens. This situation helps foreign portfolios investors and foreign institutions investors to get profitable returns on their dollar-denominated investments.

Pharmaceutical and Information Technology companies in India who are major exporters of goods and services always receive payments in United States dollar. These companies make higher gains when the dollar index rises signifying a increase in the value of the U.S. dollar.

As a major importer of crude oil, Indians pay more for crude oil when the dollar index rises. The profit margin of Indian refineries such as BPCL, IOL, and HPCL as well as oil importers gets affected when the dollar index rises.

A change in the dollar index has a great impact in the Indian stock market owing to the fact that India are major importers of crude oil, so the change in dollar index does not only affect the Indian rupee, it affects the Indian stock market and in turn affects the Indian economy. 

What happens when Dollar index increases?

An increase in the dollar index indicates that the United States dollar is getting stronger against other currencies. It shows that the value of the U.S. dollar against other currencies in the global foreign exchange has increased. This affects not just India but the economy of almost every country in the world. 

When the dollar index increases, Indian imported goods become expensive as well as dollar-denominated stocks. However, Indian stocks become profitable and investors rush to purchase more of the stocks and possibly sell when the rupee rises against the dollar.

What happens when Dollar index falls?

Like we have explained before, when the dollar index falls, it simply means that the United States dollar has decreased in value against other currencies in the world. It shows that the U.S. dollar is getting weaker in the foreign exchange market. 

A weak dollar does not always translate to higher gains for investors around the world, several set of investors benefit from a strong dollar as well.

When the dollar index falls which means that the value of the U.S. dollar has reduced, foreign portfolios investors and foreign institutions investors get profitable returns on their dollar-denominated investments.

Indian refineries such as BPCL, IOL, and HPCL as well as oil importers make higher gains when the dollar index falls, which Indian pharmaceutical and Information Technology companies get affected negatively.

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