How Do Interest Rates, Inflation, and GDP Impact the NIFTY 50?

In this article, we will discuss

How Do Interest Rates, Inflation, and GDP Impact the NIFTY 50? The NIFTY 50 Index is one of the best avenues when it comes to availing long-term returns along with portfolio diversification. It is the flagship benchmark of the National Stock Exchange (NSE) and consists of the top 50 companies listed on it as per their free-float market capitalisation.  The exchange handpicks them, as per its stringent criteria, from all the sectors of the Indian economy, making it one of the reliable indices which investors use for tracking stock market returns.  However, given its vast scope, NIFTY 50 is prone to macroeconomic risks, which can impact its returns. Thus, before investing in this benchmark, investors must keep a note of these aspects and take adequate precautions to mitigate their effects.  Keep reading this blog to know more! 

Macroeconomic Factors That Can Affect NIFTY 50 Returns

Here are some of the macroeconomic factors which can affect NIFTY 50 returns:

  • Interest Rates

When it comes to macroeconomic risks, interest rates are a vital factor. They represent the amount of interest borrowers have to pay to lenders when they take a loan. This factor tends to rise and fall periodically with changes in the demand and supply of credit.  When the interest rate rises, investors usually allocate more capital to fixed-income securities like government bonds, corporate bonds, debentures, certificates of deposits (CDs), etc. These assets are a type of loan which helps them benefit from the increased rate of interest. Now, all big corporations derive a certain part of their capital from loans. When interest rates rise, they have to pay higher interest to lenders, which reduces their net profits. It also increases their discounting rate of flows, leading to a fall in stock prices.  Alternatively, when interest rates fall, companies have to pay less interest for their borrowed credit, which increases their net profits, along with stock value. Thus, under such circumstances, investors will allocate additional capital to stocks. This proves that stock market returns are inversely proportional to interest rates.  

  • Inflation 

Inflation is a rise in the price of goods and services within an economy in a particular period of time. It increases the cost of living along with the cost of production and effectively reduces the purchasing power of consumers.  This usually occurs when demand in an economy surpasses the supply due to various factors, leading to a scarcity of goods and services, which leads to a price rise. Inflation reduces the disposable income of investors which prevents them from purchasing stocks.  Now, when the inflation rate increases, speculations on future price rises, creating a volatile environment. Investors tend to sell off growth stocks as they have minimal cash flows, and this is inversely proportional to the rate of inflation.  However, in such situations, value stocks tend to perform better. Their market prices are directly proportional to inflation rates, making them a perfect hedge for investors. Given these factors, it can be said that the stock market has a moderate negative correlation with inflation rates. 

  • GDP

Gross Domestic Product (GDP) is the final value of goods and services that are produced in a country within a specific time period. It is one of the most important indicators of a nation’s economic growth.  Hence, when GDP levels rise, it signifies a positive economic outlook which can influence investors to buy stocks. This may also result in a bull run which can significantly boost stock prices.  However, when GDP falls, it creates a negative investor sentiment, leading to less spending by both individuals and businesses. As a result, investments in the market fall, causing stock prices to spiral downwards. This indicates a positive correlation between a country’s GDP and the stock market.

Impact of Macroeconomic Factors on the Nifty 50 Index

To understand the effects of the above-mentioned macroeconomic factors on NIFTY 50, there are certain things which you must know. This benchmark contains the top 50 companies listed on the NSE. Their representation depends on several criteria, including sectoral weightage.  As per data on 15th July 2023, NIFTY 50 is currently giving the most weightage to the Financial Services sector. Thus, the performance of this particular sector will have a significant effect on Nifty 50 returns.  Therefore, if interest rates increase, the financial sector will profit from the rise in interest income, thus appreciating in value. However, if the rate of inflation surpasses the ongoing interest rates, such companies will lose money, and their stocks will decline in value.  Coming to GDP, its growth will encourage an increase in economic activity, which will contribute positively to the financial sector’s performance. As a result, it will enable NIFTY 50 to generate better returns.  Now, you must also note that there are several other sectors which comprise the NIFTY 50 Index. They include Information Technology, Oil and Gas, FMCG, Automobiles, etc. So, the Financial Sector’s performance will not be the only factor determining NIFTY 50’s return potential.  The weightage of these other sectors may be less. However, the benchmark gets rearranged on a semi-annual basis. Thus, every time reshuffling occurs, you need to assess the dominant sector’s performance under various macroeconomic scenarios and determine the benchmark’s returns accordingly. 

Best Tips to Invest in NIFTY 50

Here are some of the best tips you can follow in order to invest in NIFTY 50:

  • Invest for the Long Term

This stock market index comprises the top 50 blue chip companies from leading sectors. These companies have the potential to facilitate stable returns in the long run, enabling investors to generate a significant amount of capital. Additionally, it is an effective way for them to protect their holdings from short-term price fluctuations.   

  • Diversify Your Holdings

This may seem like a no-brainer as you are investing in NIFTY 50, which includes organisations from the leading industrial sectors. However, you should consider further diversifying your portfolio by investing in other avenues.  They may include bonds, commodities, derivatives, gold, etc. Doing so will help keep your returns stable in case the index falls. 

  • Avoid Making Decisions Based on Emotions

Several microeconomic factors, like demand and supply, changes in consumer preferences, etc., can cause short-term volatility. Under such circumstances, you must avoid taking rash decisions based on your emotions and stick to your investment strategy.  This will prevent you from making poor choices, enabling you to ride through the turbulence without any potential losses.   

How Can Samco Help Investors Ace the Index?

When it comes to investing in NIFTY 50, actively tracking returns is the secret to generating long-term profits. However, most investors do not have access to the right analytical tools which can help them perform this analysis.  In this regard, the New-Gen Samco App can be an all-in-one solution. You can create a personal index based on the stocks you purchase and beat the market by improving your performance. There is also a net worth tracker, which enables you to track your portfolio returns over time and even compare them with other Samco users.  Additionally, the app provides professional advice and personalised market insights, which can take you one step closer to achieving your financial goals.  So, if you are looking to ace the index, download the Samco app now!

Conclusion

Before you invest in NIFTY 50, it is also important to assess your investment goals, horizon and risk appetite. Furthermore, you need to develop a habit of keeping tabs on the price movements of your holdings. It is an effective way to identify negative trends early on and make appropriate decisions.

FAQs

  • What do I need to invest in NIFTY 50?
Ans. To invest in NIFTY 50, you simply need to open a Demat account with your preferred brokerage firm. After this, you can either invest in the index directly by purchasing stocks according to their weightage on the benchmark. In addition, you can also consider buying units of NIFTY 50 Index funds. 
  • What are the best NIFTY 50 Index funds?
Ans. Some of the best NIFTY 50 Index funds are ICICI Prudential Nifty 50 Index Direct Plan Growth, HDFC Index Fund Nifty 50 Plan-Direct Plan, UTI Nifty 50 Index Fund-Growth Option- Direct, SBI Nifty Index Fund Direct Growth and Motilal Oswal Nifty 50 Index Fund Direct-Growth. 
  • Can I trade on NIFTY 50 using derivatives contracts? 
Ans. Yes, the National Stock Exchange allows trading via derivative contracts of the NIFTY 50 Index. The exchange has an entire section of NIFTY 50 futures and options contracts under its Equity Derivatives section. 
  • Can I trade NIFTY 50 before the market opens?
Ans. Yes, you can trade NIFTY 50 before NSE opens. This window is only available for 15 minutes, from 9:00 AM to 9:15 AM. However, to avail this feature, you may have to ask your broker to activate the same. 
  • What is the long-term return potential of NIFTY 50?
Ans. Over the last 20 years, NIFTY 50 has generated 17.5% returns on a yearly basis. During this time, gold and debt assets returned 12.3% and 7.2% annually. This shows the benchmark’s capacity to outperform other popular investment avenues.
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