July had an important lesson for investors. It is the oft-repeated advice: Don’t try to time the market. Ignore the noise and keep investing. SENSEX and NIFTY 50 gained over 8% in the month. It’s the first time since August 2021 that the two indices have risen so prominently. If you have stayed the course, the colour of your portfolio is probably all green. Even the mid-cap and small-cap indices joined the party, rising 11.7% and 8.9%, respectively. But if you got swayed by the panic and fear, August would have begun with regrets. Of course, investors needed a lot of guts to stay calm in the past seven months. Markets have tested everybody’s nerves. But it may not be all gloom and doom hereon. At least, that’s what the data seems to suggest. But before we discuss the silver lining around the dark clouds that have engulfed the markets, a little background. The Perfect Storm: War, Inflation, and Interest Rates Since the beginning of the year, whatever could go wrong, went wrong. First, it was the Russia-Ukraine war that broke out in February. As the markets priced in the impact of this development, we saw interest rate hikes across the globe. Rising interest rates always decrease the attractiveness of investing in a risky asset class like equities. Investors flock to risk-free assets as they suddenly become good enough. Remember the forgotten FDs? Their interest rates have been slowly on the rise. For example, Bajaj Finance, India’s largest NBFC, offers as high as 7.5% p.a. interest on 44-month deposits. Seniors get a whopping 7.75% p.a. It’s no coincidence Foreign Institutional Investors have pulled out $26 billion from Indian equities in the last six months as the US interest rates rose. Indian investors are also exhibiting a similar trend of not getting attracted to equities. As markets correct, the opening of new demat accounts and new investors signing up for mutual funds have slowed down in tandem, and so has the growth of SIP flows. The Question On Everyone’s Mind: How Will Stock Market Move? Given the July rebound and August follow-through, everyone has one question. Going forward, what will happen in the stock markets? No one can predict the market with certainty. We won’t do that either. Let’s deconstruct the past and present to get clarity. To do that, we must first look at the reasons for volatility. It was the lack of clarity on three aspects. We turn to history for cues. In the past 20 years, the highest yield on a 10-year G-Sec was 9.18% (July 2008). The current 10-year G-Sec yield is 7.2% or thereabouts, falling from the 7.49% in June this year.Whether India breaches that historic high, nobody can predict. But one can say with certainty that it will depend on inflation, which will then determine the repo rates, which eventually will guide the G-Sec trajectory. But we have seen similar situations before. Therefore, we analyzed the repo rate and G-Sec trends for the past 20 years and studied their correlation. Here’s what the data showed: 1. On average, G-Sec tends to be 1.16 times of repo rate. The highest was 1.8 times, just a couple of months ago (April 2022). The second highest was 1.7 times in January, February, March, and May 2022. (Surprising that all the highs are in 2022, isn’t it?) 2. At present, G-Secs are 1.5 times the repo rate. 3. The spread between G-Sec and repo rate typically narrows as inflation gradually falls. If you go by the recent data, inflation is already showing signs of peaking. RBI, too, sees the indications. Hence, we don’t reckon the probability of a significant rise in repo rate from the current levels unless inflation throws a surprise or the geopolitical situation worsens. There are expectations of a 25-50 bps hike in the upcoming monetary policy, which is largely factored in by markets. The unknown is the US Fed. If the Fed maintains the pace of policy rate hikes, then RBI’s primary motive will be to continue the high speed of interest rate hikes. The focus would be to prevent excessive rupee depreciation, not inflation in isolation. Read our blog for more: https://www.etmoney.com/blog/making-sense-of-markets-in-2022-and-how-to-invest-from-here/ CHAPTERS: 00:00 Introduction 03:24 RISING INTEREST RATES 07:52 INFLATION & IT"S IMPACT 11:53 WILL INDIAN MARKETS BE MORE RESILIENT TO SUCH CHANGES? 14:43 DON'T TRY TO TIME THE MARKET #ETMoney 👉 To invest in Direct Plans of top Mutual Funds for free, download the ET Money app: https://etmoney.onelink.me/unJQ/5ca1ae3b 👉 Subscribe to ET Money Hindi https://www.youtube.com/channel/UCzWtyDo9KmEC1JoAqa1LIEw 👉 Read more such informative articles at https://www.etmoney.com/blog 👉 Follow us on: ► Facebook: https://www.facebook.com/ETMONEY/ ► Twitter: https://twitter.com/etmoney ► Instagram: https://www.instagram.com/etmoney_official/ ► LinkedIn: https://www.linkedin.com/company/et_money/