The benchmark index Nifty 50 is down by over 5% since Friday 10th June 2022 on the grounds of high inflation data in the US, expected aggressive rate hike by US Federal Reserve, Interest rate hikes by RBI, and other several reasons. Let’s discuss more this current fall in the stock market and what are the impacts of the repo rate hike by RBI on the stock market in this article as we move ahead.
Impact of Repo Rate Hike on Stock Market:
- Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Earlier, RBI stated that there will be an inflation of 5.7% in FY23 but within a month they have to change the inflation rate to 6.7% which means inflation is here and can stay for a long time which will have a big impact on stock markets.
- When the interest rate is increased then from the borrowers’ point of view all the loans like a vehicle, housing, personal, etc. will become expensive and the demand for all these loans will be down, Automatic sales of all these products will go down.
- Supply is already there and demand got killed so the price will go down. When the economy is vibrant the demand for this kind of product increases more and this ecosystem creates many jobs which ultimately increases the earning power of the people.
- If the volumes get reduces then it will impact the profitability of the companies, and the borrowing cost for corporates also go up. With lower revenue and rising cost, the profitability of the company got impacted.
- Decreased net profit will lead to a fall in EPS (Earning per share), when EPS is fall or growth is on the lower side then it will impact the stock price of the company. This will impact the overall broader market as every company will face this problem.
- There are always two types of correction that takes place one is price correction and another is time correction.
- In price correction, the price of the stock goes down or is corrected whereas in time correction the price of the stock remains at the same level.
- If there is inflation of 3% to 4% with GDP growth of 6% to 7% then we can expect a 10% to 11% return from the stock market in long term.
- The economy can struggle if inflation increases as the profit of the companies will reduce and also fall in the stock market.
- Once the inflation starts going down, Ukraine Russia conflict will be settled down, or at least the crude oil problem gets solved then a new system will start developing and the price will start showing good appreciation. But in short term, this pain will be there for 1 to 9 months of high inflation.
Reasons for Fall in Stock Market:
1) US Inflation Data:
- On Friday 10th June 2022, the US Inflation data is worse than expected and the market is expecting an aggressive hike in the interest rates of around 0.75% in the next meeting of the Fed Reserve.
- This scenario of higher interest rates and lower GDP growth is a poor combination for any economy and it might lead to ‘Stagflation’.
2) Cascading Impact on US Market:
- The worse-than-expected inflation data of the US had resulted in a fall in the USA market, which is also leading to a fall in the Indian markets.
3) Global Weak Cues.
4) Rupee-Dollar Equation:
- Rupee hitting an all-time low at around 78.29 per dollar.
- A weak rupee makes domestic stocks less attractive.
5) Covid outbreak in Beijing’s most populous district of Chaoyang
What Should Investors Do?
Due to this unprecedented inflation, the return which has been seen in 2020 can’t be expected in this financial year, this year will of so much consolidation. An investor should have a staggered way of investing and this time is all about the accumulation in the investment and thinking only about return will not work. This is an opportunity for investors in fixed income as it is rising and long-term G-Sec yield is more attractive. Also from financial planning viewpoint, it is a good time to accumulate good stocks during this market condition.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.