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Do Indian Exports and Imports affect the Stock Market?

24 May 2022

Globalisation has made foreign goods and services widely available in India while the Subcontinent has been able to export its goods and services to foreign markets. The demand for foreign goods across the global market has seen an uptick with the world becoming a global village. Thus, imports and exports have become a crucial part of the Indian economy. In 2020, India’s ratio of imports to exports of goods and services to the GDP was recorded at 27.8%.

In the first three quarters of the 2021-22 fiscal year (April to December), India imported $495.83 billion worth of goods from the U.S and exported $335.44 billion worth of goods to the U.S. Given these massive figures, the question of whether or not they affect the stock market is a valid concern. What happens when the imports or exports drop or start to rise and how does this impact the stock market? Read on to find out more about it!

How are Stock Markets Affected?

It can be said that trade does impact the stock market. The following are the different channels through which trade affects stock markets.

Trade Firms

Naturally, firms who are directly involved in the import and export of goods and services are affected. When there is a large volume of imports, the profits of import firms increase and their share prices increase. Similarly, when there is a large volume of goods and services being exported, it means that Indian firms are expanding to new markets. These export firms benefit from this and their share prices increase. On the contrary, if the volume of imports and exports go down, import- and export-oriented firms are negatively affected and their share prices go down.

Trade Deficit or Trade Surplus

Apart from their individual effects, exports and imports together can also affect the stock market. This is because of the trade deficit or surplus. Trade deficit occurs when the volume of imports of a country exceeds the volume of exports. Contrarily, trade surplus is when the volume of exports exceeds the volume of imports. 

When a country has a consistently high trade deficit, it means that it has a lot of debt. This reduces the confidence of foreign investors in the domestic market and they start pulling out their funds. This negatively affects the stock market. Moreover, if the deficit is high, this either means that people are spending more on foreign goods than locally produced goods or that domestic producers are having a hard time selling their goods abroad. This hurts domestic producers and their share prices. A surplus is good for the stock market but then, too much surplus is again bad. 

Generally, if a country’s trade deficit is less than 3% of the GDP, it is considered to be ideal since it usually implies that the country is in an expansion phase. 

Exchange Rates

When imports and exports move unfavourably, the government may make changes to the exchange rate so as to control them. This in turn ends up affecting the stock market. For instance, if there are too many imports in a country, the government may devaluate the currency so as to control the volume of imports. When this happens, the value of the Indian rupee (INR) goes down and foreign investors may pull their money out of Indian markets which in turn causes the Indian markets to decline.

Import of Capital Goods

Certain firms require foreign technology in their production processes. In this case, they import the machinery. If the conditions to import are amenable, the input costs of the firm go down and their stock prices increase. But if the government is trying to discourage imports, the production costs go up, profit margins go down and stock prices also go down.

Economic Impact of Imports

The effect of imports on the local economy is a major concern. Certain nations may practise dumping of their goods at cheap prices. This is most commonly seen in the electronics, chemicals and consumer durables markets. Countries like China export these goods at large to countries like India and the local producers face the consequences. They are often unable to match the cheap prices of the imported goods and end up suffering losses which cause their share prices to fall.

Taxation

As people move up the income ladder and the standard of living increases, people start demanding more and more luxury goods. This phenomenon is most observed in the middle-class section. They start substituting cheaper goods with expensive goods with better quality (like consuming high-quality imported rice instead of cheaper alternatives like barley, or purchasing an Apple phone instead of Indian phones like Micromax or Intex). When this happens, the government imposes a luxury tax to help out the domestic producers. Another use of the tax is to control the volume of imports. 

If the government wants to reduce the level of imports, it may increase the luxury tax on goods. In this case, costs go up, profit margins decline and stock prices fall. Conversely, when it wants to encourage imports, it may reduce the tax. If the tax is reduced, it benefits the firms as the cost goes down and the stock price increases. 

The takeaway

The bottomline is that there is a strong correlation between stock markets and international trade. When investing in firms that import/export goods, it is advisable to consider the import-export conditions.

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