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Decoding The Fall In Market

Equities worldwide and India have given spectacular returns over the year and a half since the pandemic struck. However, in October and November, FII’s has been net sellers of over INR 25,000 Cr. and 31,000 Cr respectively. During this period, the DII’s have also not participated in buying apart from INR 25,000 worth of equity in the Cash Market. So, what has made these institutional investors skeptical suddenly?

The Tapering Process Of The U.S. Federal Reserve

This sudden fall can largely be attributed to the U.S. Federal Reserve’s start of the tapering process. To clarify this further, tapering is a stance taken by the apex bank of any country to boost the economy in times of distress or due to any untoward alarming situation in the country. So, when the Covid hit in early 2020, the U.S. started its tapering process to revive the economy. It brought down interest rates to a historic low. It started the bond-buying program wherein it bought government bonds and thereby provided funds to the economy. Low-interest rates allowed people to spend more by taking easy loans. The companies would be encouraged to start their CAPEX cycle. However, since every government decision is based on the situation, and any Quantitative easing as they call it cannot last long. Thus, Fed has now provided a glimpse of the future, saying that interest rates will be raised in 2022.

The Rise In Interest Rates and Stock Market

As institutional investors have received signals, which is leading to the withdrawal of money from emerging markets, including India. As the interest rates will rise, the funds will not be available at cheap rates to invest. Further, the interest rate disparity between emerging markets and developed economies will now shrink. Institutional investors can now re-strategize whether to invest in government bonds or fixed deposits at a higher interest rate without risk or invest in emerging economies that have a higher risk. All these factors, coupled with the fact that the valuation of the Indian stock market is at its all-time peak, have led to a steep fall in markets.

Entry Of New Covid Variant

The new Covid variant has acted as a catalyst and has further led to fears. The governments take a cautious stance on the new variant behavior and control their international boundaries and travel.

A correction in the market was imminent. If you were tracking on any stock and were unable to buy, thinking it overvalued, such corrections are always an opportunity to buy

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