So, while interest rates may continue to rise, there is little room for them to rise unabated if history is a reliable guide (which we believe it is). At present, the spread is too wide and may narrow down, as has happened in the past. Even if there is room for the repo rate to go up, the fixed income rates may not rise drastically, as reflected by the past G-sec and repo rate’s correlation. This is where the historical correlation between G-Sec and repo rate matters. The good news: After increasing the policy rate by 75 basis points on July 27, the US Fed has signalled that the pace of further rate hikes may be moderate. The focus would be to prevent excessive rupee depreciation, not inflation in isolation. If the Fed maintains the pace of policy rate hikes, then RBI’s primary motive will be to continue the high speed of interest rate hikes. There are expectations of a 25-50 bps hike in the upcoming monetary policy, which is largely factored in by markets. Hence, we don’t reckon the probability of a significant rise in repo rate from the current levels unless inflation throws a surprise or the geopolitical situation worsens. If you go by the recent data, inflation is already showing signs of peaking. As markets correct, the opening of new demat accounts and new investors signing up for mutual funds have slowed down in tandem, and so has the growth of SIP flows. Indian investors are also exhibiting a similar trend of not getting attracted to equities. It’s no coincidence Foreign Institutional Investors have pulled out $26 billion from Indian equities in the last six months as the US interest rates rose. For example, Bajaj Finance, India’s largest NBFC, offers as high as 7.5% p.a.
Remember the forgotten FDs? Their interest rates have been slowly on the rise. Investors flock to risk-free assets as they suddenly become good enough. Rising interest rates always decrease the attractiveness of investing in a risky asset class like equities. As the markets priced in the impact of this development, we saw interest rate hikes across the globe. First, it was the Russia-Ukraine war that broke out in February. The perfect storm: War, inflation, and interest rates Since the beginning of the year, whatever could go wrong, went wrong. But before we discuss the silver lining around the dark clouds that have engulfed the markets, a little background. At least, that’s what the data seems to suggest. But it may not be all gloom and doom hereon. Of course, investors needed a lot of guts to stay calm in the past seven months. But if you got swayed by the panic and fear, August would have begun with regrets. Even the mid-cap and small-cap indices joined the party, rising 11.7% and 8.9%, respectively. If you have stayed the course, the colour of your portfolio is probably all green. It’s the first time since August 2021 that the two indices have risen so prominently. SENSEX and NIFTY 50 gained over 8% in the month. It is the oft-repeated advice: Don’t try to time the market. By ET Money July had an important lesson for investors.
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