Bombay, August 6 (SocialNews.XYZ) Interest rates and the stock market have an inverse relationship, but this time it turned out to be wrong because even after the Reserve Bank of India (RBI) hiked the repo rate by 50 basis points, the stock market jumped up.
This is not the first time the dynamic has changed, but in the past 15 years, there have only been three instances where the stock market gave negative returns during the RBI’s rate hike.
According to Dr. VK Vijayakumar, chief investment strategist at Geojit Financial Services, from 2003 to 2008, the Fed raised rates 17 times in a row. Despite this severe monetary tightening, stock markets soared globally.
In India during this period we had the mother of all bull markets which saw the Sensex soar from below 3,000 in 2003 to 20,000 at the end of December 2007, he said.
During this period, India saw record growth in GDP and corporate profits despite the RBI’s tightening rates.
Over the past few days, the domestic stock market has seen a sharp rise after foreign investors returned to the Indian market due to weak dollar index and rising corporate profits. Sentiment among foreign investors was also bolstered after US data showed the economy contracting for the second consecutive month raised hopes that the US Fed will not hike rates aggressively.
Foreign investors turned buyers in July almost after 10 months, with around Rs 4,980 crore invested in Indian stock markets. This is accompanied by a strong sale by these entities of around Rs 50,203 crore.
According to NSDL data, investment by foreign investors during the month of July amounted to Rs 4,989 crore, compared to over Rs 50,000 crore outflows in June, Rs 39,993 crore in May and Rs 17,144 crore in April .
“There is a complete reversal in REIT activity in the Indian stock market. REITs that were relentless sellers in the Indian market from October 2021 to June 2022 turned net buyers in July and buying continues in August, so far,” added Vijayakumar.
Since July 26, the Sensex has climbed over 3000 points to 58,387.93 and Nifty is up over 1000 points. During the same period, more than Rs 10,000 crore shares were purchased by foreign investors.
On Friday, the RBI’s Monetary Policy Committee (MPC) voted unanimously to raise the repo rate by 50 basis points to 5.40%. As a result, the Standing Deposit Facility (SDF) rate was adjusted to 5.15% and the Marginal Standing Facility (MSF) rate and the Bank Rate were adjusted to 5.65%.
It is the third consecutive rate hike by the central bank this year after rising 40 basis points in May and 50 basis points in June. Along with the rise, the RBI has raised its rate by 140 basis points since May this year.
Sneha Poddar, AVP, Reserve, Broking & Distribution, Motilal Oswal Financial Services, said interest rates do not affect all sectors equally. While there are certain sectors that tend to be affected, on the other hand, there are sectors that benefit like banking. Thus, indebted companies tend to bet without flavor while investors turn to more stable companies.
Going forward, the stock market is expected to trend upwards with rising interest rates. “We believe the trend may continue as strong macro data, stable earnings, slowing commodity prices and healthy monsoon advance support India’s economy,” Poddar added.
Experts believe that India should be one of the fastest growing economies in the world and inflation seems to be moderating, RBI may not be so aggressive in its rate hikes.
Poddar also added that in addition, with capacity utilization in manufacturing being above the long-term average and improving new orders in Q2FY23, this would fuel further investment needs. This, along with the upcoming holiday season, would support economic growth.
On the other hand, FII seems to have made a comeback which would further support the market.