Agg lavan majboori nu, mehngai di pasoori nu
Because inflation says " real chaos is me", creating cry havoc among nations as they tend to hike rates, which has caused market free falls, leaving investors on their own wit's end. The Fed hiked rates by 50 basis points. Looks like the chairman wanted to create history with the sharpest increase in 20 years and other nations followed hike rates.
Let's have a glance at the snag itself. What is inflation??
In layman's terms, today you can purchase a dozen bananas for Rs 30 (since that's what investors are left with after the selloff), but next year the same amount will only get you 10 bananas because things become more costly over time, and that's what Inflation is, decrease in purchasing power of money.
With retail inflation hovering around 7%, RBI projects increased hike rates in coming months to tame inflation with the repo rate increased by 40 basis points. While the Situation at our neighbour's door is bigger as Sri Lanka and Pakistan suffer economic crises and the overall globe is nothing different as the USA, China, and South Korea are drowned in pain caused by mammoth inflation numbers. A combination of strong consumer spending, persistent supply constraints, and dramatically increased gas and food prices has escalated inflation, which has been compounded by Russia's conflict with Ukraine and Inflation says Peekaboo!!.
While global market selloff and FII selloff are nothing less than a chicken and egg problem because one is the reason for the other which has already dampened Indian markets. wherein FII's have pulled a shitload of money out of Indian markets tuning to around 1.5 lakh crores in 2022 alone. worried about the selloff?? Go on a Vacation or sign up for a summer internship.
The Dynamics Behind Rate Hikes and Stock Performance;
Sentiments: Demat openings skyrocketed during the Pandemic period, According to data from SEBI, "an average of 26 lakh new demat accounts were opened every month in the year ending March 2022, as against a monthly average of four lakh in 2019-20."
David Thoreau Quotes," If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them. Retail investors have become a force to be reckoned with 'when the markets zigs, I zag'. But all the 'To the Moon' Lovers born onto the market during the Bull run period post-pandemic have some serious lessons learned from recent free falls, one of them being You Just can't time the market.
Markets retaliate contrastingly during the year of hike rates but Indian markets have already plummeted around 8% since the announcement by RBI.
Here is a table showing Nifty50 Performance over various rate hikes:
And here is performance of various sectors across economy in the following year after hike rates;
"History suggests U.S. stocks are poised to experience more volatility following the rise in rates. But that doesn’t mean the bull run is over. In fact, in the previous eight hiking cycles, the S&P 500 was higher a year after the first increase every single time, according to LPL Financial."
Each time the market responds differently due to various factors as Hike rates affect various sectors differently. For example:
1) Banking sector: Banks ultimately change rates accordingly but the change in rates will affect housing demand significantly or even default payments.
Similarly, a Twitter user quotes "The risk is in the credit market. Sovereign debt levels are so high that governments can’t hike rates high enough to battle inflation, without raising solvency issues. We are at the end of a once-in-a-lifetime debt cycle that dwarfs a banking crisis by many levels of magnitude". No he isn’t a bot ifykyk.
And soon you will see a rise in Interest rates in Fixed deposits but
Won't be able to beat inflation still.
While DII bought out large FII selling, market sentiments weren't changed by this overall.
"Economists value sentiments over diamonds"
With possible rate hikes in the future, Markets have become completely unpredictable. You will see your positions go 5% Up in the morning session and some 2P.M Fed meetings will change your green into red in minutes. But the flames of Inflation will not be put off soon we think.
Some Financial Pundits say this is just the beginning of the turmoil.
Hence, Book Losses and go home or Buy the dip/Falling Knife.