RBI policy can break the ‘safety net’ of the stock market, retail investors can go away from the market
Reserve Bank of India (RBI) Deputy Governor Michael Patra has recently given some warnings to stock market investors about the future, which everyone should keep in mind. Patra stressed that the domestic economy may face some hike in interest rates due to higher inflation levels. At the same time, however, he also warned that the monetary policy action is “unlikely to be painless”.
The pain Patra is talking about can have a double effect on the stock market. On the one hand, due to slow economic growth, the earnings estimates of companies will be low. At the same time, due to increase in interest rates, banks will also increase the rates of their fixed deposits, which can take away investors from the stock market. The second of these two reasons may be more worrying for the stock market.
Western countries believe that if the real interest rate that investors get on their deposits is positive, then this drives investors away from the stock market. However, such evidence in India is still limited. Also read- Daily Voice: The market may fall further, banking, capital goods and infra shares are good for investment, the real interest rate in India (repo rate minus the average inflation rate of FY 2023) minus 1.8 percent. This negative interest rate during the Corona pandemic had encouraged investors not only in India but across the world to turn to the stock market for higher returns, leading to a bull rally in the markets. Negative interest rates make families think about where they are saving their money. At the same time, it also forces them to take risk for higher returns. According to the IMF, investors often look at actual inflation-adjusted rates beyond the normal interest rates and make their investment decisions based on that. “Negative or low real interest rates encourage investors to take on more risk,” the IMF said in a statement in January.
In India too, in the last few years, due to inflation-adjusted negative rates on savings and fixed deposits, more and more households turned to the stock market for better returns. However, now a hike in interest rates may pull investors back from the market towards fixed deposits in banks or other investment options.
Retail investors had become a security wall
Foreign investors have been continuously pulling money in the Indian stock market for the past few months. The market has hardly seen such continuous selling from foreign investors for such a long time before. According to Finance Minister Nirmala Sitharaman, however, retail investors have emerged as a safety net for the stock market during this period. Foreign investors have sold around Rs 3 lakh crore in the last 9 months.
It is also worth noting that after the Corona epidemic, the number of demat accounts in the country has more than doubled to Rs 9.5 crore and during this time these investors have made fresh investments of about Rs 3 lakh crore in the market. However, with the RBI policy in the coming times, this ‘safety net’ of the stock market may seem to be moving away from the market.
When asked about RBI’s stand on positive real interest rates, Patra said, “Families put in the most money in the economy. Due to negative real interest rates, a large number of households had turned to the stock market and we have to do it soon.” needs to change.” Patra’s statement suggests that the central bank wants maximum number of households to invest their savings in the real economy and not in financial assets like shares of companies.
