Today Indian citizens are dealing with inflation, high commodity prices, volatile stock market, rising petrol/diesel prices, and the Ukraine-Russia war. All while the economy recovers from the after-effects of COVID-19.
The situation might be too much for a layman to handle, but you can always learn from the past. In the late 1920s, we faced a similar situation where the market fell steeply and took a long time to recover.
In the 1920s, the Fed adopted an accommodative policy which resulted in high inflation and rising bond yields during 1916-1930. We are in a similar situation now. Currently, the RBI is holding an accommodative stance while thinking for the best interest of the economy. The question arises, what if the recovery takes longer than anticipated like it did in the late 1920s?
One thing to note here is that the Indian market moves in tandem with Wall Street. If the Federal Reserve decides to hike the interest rates, the ripples of that decision will be felt in India as well. The central bank plays a vital role in handling inflation, and right now, everyone’s eyes are on the RBI and the Fed.
How Does the Fed Affect India?
Indian companies are fuelled by foreign investors, especially from the US. If the US market goes down, so do the Sensex and the Nifty50. That is what we are witnessing right now. Coming back to the Fed, it said in March last year that it saw no rate hikes till 2024. But now, the current economic situation does not support this statement anymore. If we look back in the past, in 2008, the Fed lowered the interest rate in hopes of a soft economic landing. However, this experiment failed and did not yield great results.
In the present situation, the continuous capital outflow is pressurising the rupee. If the Fed rate hikes, then the Indian market will become expensive. The stock market recovery is expected to take volatile swings because that’s what happened in the past too.
What Lies Ahead?
The Ukraine-Russia war is getting uglier with every passing day, affecting the global economy resulting in inflation. As long as the war goes on, stock markets will remain volatile. What you can do right now is allocate your capital to different assets.