Correlation Between Sectoral Indices | 2025 Trader’s Guide

The correlation between sectoral indices helps investors see how different parts of the Indian stock market move in relation to each other. Whether it’s Banking, IT, Pharma, or Auto, understanding these links can guide diversification, hedging, and rotation strategies. This guide by The Finxperts Academy simplifies sectoral correlation for 2025 traders.

What Are Sectoral Indices?

In India, NSE and BSE publish multiple sectoral indices that track industries individually:

• Nifty Bank → measures banking performance.

• Nifty IT → covers tech companies like Infosys, TCS, Wipro.

• Nifty Pharma → healthcare & pharma players.

• Nifty Auto → automobile manufacturing stocks.

• Nifty FMCG → daily consumer goods leaders.

Each index works like a barometer for its industry. But their real power is seen when traders study their correlation — how they rise and fall together (or apart).

Why Correlation Between Sectoral Indices Matters

Traders rarely put all money in one sector. By checking correlations:

• They avoid overlapping risks if two sectors move alike.

• They design hedges using opposite-moving indices.

• They identify sector rotation — when money exits one sector to enter another.

• They sharpen macro market analysis.

As Investopedia explains, correlation is key in portfolio design.

Positive vs Negative Correlation Explained

• Positive Correlation: Both indices move together. Example: Nifty Bank & Nifty Financial Services.

• Negative Correlation: One rises, another falls. Example: Pharma rising when Bank drops in crisis.

• Low Correlation: Weak link; both move independently. Example: Auto vs IT.

Real-World Examples

1. Banking vs Financial Services: Their movements are almost identical since both depend on interest rates.

2. IT vs Global Tech (Nasdaq): Nifty IT shows strong global correlation because earnings come from exports.

3. Pharma During Covid: While Bank collapsed in March 2020, Pharma rallied strongly, showing negative correlation.

4. Auto vs Energy: Fuel costs and energy policy often influence auto demand, linking the indices.

Impact on Trading Strategies

The correlation between sectoral indices shapes multiple strategies:

• Hedging: Pair long in one sector with short in another.

• Pairs Trading: Exploit gaps when two highly correlated indices temporarily diverge.

• Rotation: Move funds into outperforming sectors, exit correlated laggards.

• Options Strategies: Use index options to hedge cross-sector risks.

For example, if IT is weakening while Banking is strengthening, traders can balance exposure.

How to Track Correlation in India

• NSE Sectoral Indices.

• TradingView for custom correlation charts.

• MoneyControl sector analysis.

• Correlation coefficients in Excel/Google Sheets.

Case Study

In 2022, RBI’s interest rate hikes boosted Nifty Bank but hurt Nifty IT. Traders who studied this negative correlation rotated into banks early and gained, while avoiding IT losses.

Why Learn with The Finxperts Academy?

At The Finxperts Academy, we don’t just teach candlestick or technicals — we train students to understand inter-sector correlations and apply them in real-time.

• Workshops on NSE/BSE sector indices.

• Hands-on analysis sessions with mentors.

• NISM-focused modules for fundamentals.

• Career-oriented training with live practice.

Our Noida center and online classes give traders the tools to read markets beyond just individual stocks.

FAQs

Q1: What is correlation between sectoral indices?
A: It measures how two or more indices, like Nifty Bank and Pharma, move relative to each other.

Q2: Which are India’s main sectoral indices?
A: Nifty Bank, IT, Pharma, Auto, FMCG, Energy.

Q3: Why does correlation matter?
A: It guides diversification, risk management, and rotation strategies.

Q4: Can Pharma and Bank indices move opposite?
A: Yes, during crises Pharma often rises while Banks struggle.

Q5: Is correlation permanent?
A: No, it shifts with global and local factors.

Q6: How can traders track correlation?
A: NSE/BSE portals, TradingView charts, or MoneyControl.

Q7: How did Pharma behave in Covid?
A: Pharma surged while other indices fell, showing negative correlation.

Q8: Can correlation be used for hedging?
A: Yes, traders hedge using negatively correlated indices.

Q9: Do academies teach this concept?
A: Yes, Finxperts integrates it into advanced trading programs.

Q10: Is correlation reliable?
A: Useful but must be combined with volume, trend, and macro analysis.

Institute Info 

The Finxperts Academy
B-11, Sector 2, Noida – 201301
Website: www.thefinxpertsacademy.com
Email: thefinxpertsacademy@gmail.com
Phone: +91 9717333285

Disclaimer 

This blog is for educational purposes only. Stock market investments are subject to risks. Please do thorough research before investing.