Key Differences Between the Indian Stock Market and Global Indices

The Indian stock market has attracted international attention, especially given its solid growth rate, dynamic companies, and increasing investor base.

But navigating its intricacies may be a journey distinct from what one may experience on global indices. Dive into this informative piece to understand how the stock market in India compares to the top indices of the world.

1.Economic Fundamentals and Growth Trajectory

India is a developing economy with an expected GDP growth rate of 7% in FY 2024-25. High growth potential is often found in the Indian market, which is largely driven by domestic consumption, a youthful demographic, and rising middle-class aspirations. Developed markets like that of the US or Europe usually exhibit slower but stable growth rates.

Established economies focus on innovations and sustaining existing wealth, which is not a typical feature in India. Markets, therefore, perform differently between the two, with the Indian market usually exhibiting increased volatility and higher growth potential.

2.Market Composition and Sectoral Differences

Indian indices are dominated more by sectors such as financial services, information technology, and energy. It reflects the general economic focus and industrial landscape. For example, Nifty 50 and BSE Sensex are heavy in financial and IT companies.

The global stock market indices tend to be more diversified sectorally. For example, the S&P 500 has a higher proportion of technology, healthcare, and consumer goods sectors. Sectoral differences may influence investment outcomes, especially during economic transitions when some sectors outperform or underperform compared to others.

3.Foreign Investment Patterns

India as a whole had highly changing foreign investment flows. Generally, India's emerging status was coupled with geopolitical risks along with currency volatility, leading to fluctuating foreign investments. FPIs add liquidity and help spur growth but also lead to significant outlays, which turn the Indian market much more volatile.

On the other hand, foreign investments are relatively stable in developed markets because institutional investors are assured of the stability and maturity of these economies. Such differences in foreign investments affect the performance and volatility of the Indian stock market as compared to the major world indices, and the latter often tends to be less sensitive to the shift in global economies and sentiments of the investors.

4.Currency Fluctuations

The Indian rupee is one of the emerging market currencies. Its worth fluctuates regularly, influenced by inflation, trade deficits, and macroeconomic policies. This makes it a much riskier proposition for foreign investors as their returns are influenced by the depreciation or appreciation of the currency.

Investors in global indices linked to stable currencies like the US dollar or euro face fewer risks. This dynamic tends to make the Indian market more appealing to high-risk, high-reward investors while attracting stability seekers to global indices.

5.Investor Demographics and Market Maturity

The Indian stock market's demographic profile of investors is relatively young, with more first-time investors entering the market, especially after the digital revolution in stock trading. In contrast, the markets in developed economies have a more mature investor base with high institutional participation.

Retail investors in India are driving the stock market trend and fluctuations with short-term news or events. A better balance between retail and institutional investors in global indices may lead to more stability and less vulnerability to short-term volatility based on individual sentiment.

6.Valuation

Indian stocks have a strong potential for growth. So, they tend to trade at higher price-to-earnings ratios compared to developed markets. Again, these valuations can be seen as reflecting the growth potential of Indian companies.

However, they also signify greater risks if earnings fail to meet growth expectations. While investors in global indices might receive lower valuations, they know that their returns are stable.

Final Words

Understanding the major differences between the Indian stock market and global indices gives an insight into the opportunities and challenges inherent to each. For investors, this is important in shaping an effective investment strategy that addresses their risk tolerance and financial goals. If you need more information about domestic and global indices, use the stock screener app Research 360 from the house of Motilal Oswal.

(This article is part of IndiaDotCom Pvt Lt’s sponsored feature, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility or liability for any errors or omissions in the content of the article.)