Inflation and Stock Markets

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When important government institutions announce critical decisions, one has to go beyond the obvious implications of those decisions. This is clearly evident in financial markets. When central bankers worldwide almost unanimously cut policy interest rates and infused liquidity in financial markets to revive economic growth, there was a critical outcome which prudent investors and observers had to bear in mind: Inflation. The resultant impact simply can’t be ignored. Increasing supply of liquidity and loose monetary policies globally ensured rapid resumption of asset prices and economic activity. But the increase in money supply also creates a real inflation challenge.

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Unbundling the ‘progressive’ toolkit

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One of the recurring arguments that we hear whenever the country launches a new project or buys an expensive piece of essential equipment is that the money could have been better utilised for feeding quite a few less fortunate people. Capital, especially in a developing country like India, is somewhat scarce and there are several competing uses for the available capital. As a society, there is no doubt that we should endeavour to use the capital resources to create a just and fair system where economic opportunities are available to all but at the same time generate the best possible returns on the capital employed. While it cannot be anyone’s argument that the destitute amongst us should be left to fend for themselves, the effort should be to support them till they become self-reliant. The Government should take the responsibility of skilling the needy and create the required growth momentum in the economy such that the newly skilled find gainful opportunities to earn a decent living. It is important to recognise that beyond a point, doles offer a perverse incentive to remain unskilled and push the lazy and unambitious to remain a drag on society. Such instances among some of the idle and able-bodied menfolk are well-known even as political parties compete with each other in doling out freebies indiscriminately out of tax-payers’ money. Governments would do well to strictly direct doles to the really needy and keep it at a level where the recipients do not feel comfortable enough to avoid exploring opportunities for earning a decent livelihood. This is an ongoing process and if anything, has gained significant momentum in recent times.

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UNHOLY TROIKA OF RISING BOND YIELDS, DOLLAR REBOUND & SOARING COMMODITY PRICES

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Led by the US, most global markets started to get the early quiver as Bond Yields rose to lead to the strengthening of the Dollar and as the commodity cycle continues to put pressure on the upside. With US Bond yields breaching the crucial 1.6% mark, Equities got into a Risk-off as global allocations became less attractive. Rising bond yields is inversely correlated to its prices impacting the risk premium enjoyed by Equities during these cycles

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