The answer to the question is more people are buying stocks than people who are selling in the Indian Stock Market. Following the principle of supply and demand, the supply of stocks is lower than the demand. So there are more buyers than sellers.
But, I know you already know all this. What you want to know is, why more people are buying stocks than selling. There is no single reason actually. First of all liquidity. When bonds and fixed deposits pay you less ( before and after-tax) then people might prefer stocks. And Indian Stock Market is blessed ( read flooded) with cash from the developed market. The bonds are not paying that much in developed markets, as the central banks are buying bonds, so money is chasing growth.
When retailers like us hear any news, one thing we need to understand is that the big market players already know this, maybe they found out 7 days back and the news is already baked into the price. The stock market is forward-looking. It is going up or down based on the expectation of the future not based on the past, which is reflected on the News.
Since the Indian Stock Market is not a small market anymore, it has like 3 trillion market cap at this moment, so there are large investors buying up emerging market stock. And the Chinese government helped India too, by banning apps and whatnot. It made the foreign investors jittery, so many came to the Indian Stock Market.
Considering the government’s push on privatization, spending on infrastructure, and withdrawal of retrospective tax, India is looking much more lucrative investment destination. And especially the post-pandemic world has shown the investor China is not a reliable partner. As a result, India is getting some love because it is still the second-largest populist country and a big middle class rising.
End of the day, money chase returns, growth, and the big Indian market gives investors hope of growth, hence good return in the Indian Stock Market. But one word of caution, do not get trapped by value in this market. While everything might appear expensive and some stocks might look cheap, as no big player has invested in them, but don’t get caught in the lure of value.
What Could Be The Negatives To Encourage Me To Go Short In Indian Stock Markets?
Of Course, the increase in US bond yield will be a flag and might start a sell-off in the Indian market. If inflation lingers around in developed markets like Europe and the US and if the central banks finally have to admit that the inflation is not transitory and they decide to taper the bond purchase program and increase the interest rate, that will be a sign to prepare for a correction.
The same thing applies even if the Federal Reserve does not admit that inflation is not transitory but the bond yield goes up, that will be another sign of a correction.
Persisting inflation in India, if the interest rates go up in India that will be negative for interest-sensitive sectors.
How will US bond tapering will impact Indian IT stocks?
As the US economy recovers from pandemic and inflation continuous to bother, the taper is coming back sooner than one would have expected. There are a few things or factors that play out when Fed starts tapering. First think the price of US$ goes up against other currencies. And people often think tapering will send shockwaves. Let me tell you, tapering won’t, in case of markets react negatively, Fed will stop immediately.
After the global financial crisis it has been evident that whatever Fed does, it does to help the stock market and inflate asset prices. If interest rates increase in the US, borrowing capacity or hunger to hunger might come down. Although I do not think IT spending will go down anytime soon in the post-pandemic world. 2 reasons, 1 – during pandemic India could prove that they can deliver even from home and 2nd is IT infrastructure and offshoring will get even bigger.
Now, can Fed tapering impact Indian IT stocks? Not in long run. The bigger companies are already diversifying to other countries such as Japan, middle eastern countries. If the USD gets stronger that will mean more revenue in INR.
If US 10 years bond starts yielding at 2% or so, the markets may see some selling pressure, that might pull down the stock prices all across the board, but that will be a temporary price correction, fundamentally nothing will be impacted.