The BSE Sensex, The most popular stock market index in India today fell by 1,939 points or 3.8% to close at 49,050 points.
Why did this happen? Stock prices in India The day before, there was a very close relationship between how stock prices move in the United States (US). Yesterday, the Dow Jones Industrial Average, the main stock market index in the US, fell 560 points, or 1.75%, to 31,402 points.
This is mainly due to the fall U.S. government bond yield Going up. The U.S. government sells bonds that pay a certain interest rate to cover its monetary deficit, or the difference between what it earns and what it spends.
Yesterday, yields or yields on a ten-year U.S. government bond rose 1.5%, the highest in more than a year. Yields have been steadily rising for a month, but yesterday it rose. The yield on a bond is the return that an investor expects when he or she buys a bond on a given day and at a given price and holds it until maturity.
Ten-year US bond yields have risen mainly because investors expect inflation to rise in the US in the coming months. More and more people are getting vaccinated and going back to what they have always done, eating, shopping, taking vacations, borrowing and buying things in general will increase consumer demand.
Supply does not accelerate with an increase in demand, the same group of goods and services chases more money, and therefore, an increase in prices in general or high inflation.
More Inflation This means that interest rates will also rise across the economy.
Investors do not wait for things to play out, they start the factor in their beliefs and start by immediately implementing the possibilities of different situations. With revenue from Fixed income investments It raises interest, with investors selling from stocks.
Investments that offer a fixed return are less risky and when they give a higher return than in the past, they become more attractive to invest in. Therefore, investors take money out of stocks, which is risky. This is what happened in the US yesterday and in India today.
Of course, not everyone works on the basis of one theory. Some investors sell because others are selling. And stock prices fall beyond a point because stock prices fall.
Beyond that, U.S. government bonds are considered the most secure financial securities in the world. If the yield from these bonds increases, the prices of all other financial assets will adjust downwards.
As interest rates in the US suddenly look more attractive, it is no surprise that foreign investors are dropping Indian stocks today.
Furthermore, with the rise in the yield on US bonds, the same is happening in the case of Indian bonds. Yields on the ten-year Government of India bond rose to 6.23 per cent today, up 20 basis points from February 17. One hundredth of a basis point.
This indicates that interest rates are likely to rise in India, making stocks a less attractive proposition.
Vivek Kaul is the author of Bad Money.