Recently US consumer price inflation [CPI] was released, which showed an increase in inflation. After this data we saw the Dow Jones Industrial Average [DJIA] mildly corrected. 11th April was a holiday for Indian markets on account of Ramzan. So we could not see any corrections. But, it is expected that Indian markets might have a correction.
Now the question is, how does US inflation data affect Indian markets. The answer is very simple, increase in inflation may reduce the possibility of June rate cuts by Fed Reserve.
Relationship between Fed rates and Indian stock markets:
Indian stock markets are highly influenced by activities of FIIs. The FIIs' investing decisions are based on many factors like valuation, future prospects, etc. Among those Fed rate is also a factor.
Whenever the economy performs better the Fed Reserve would cut the rates. Economy performs better when the inflation decrease.
When there is rise in inflation the Central Bank of any country would increase their rates. This makes the borrowing cost of banks from Central Bank to rise. So, banks lend money at a higher interests. So, people find it little expensive to borrow money from banks. In this way the purchasing power of people reduce. So the inflation decline.
So, increasing interest rates shows that the economy does not perform better. This indicates that, if the economy is not strong then people don't have buying power and the companies are unable to expand their operations due to high cost of manufacturing.
This makes the investors to pull back their investments in stock markets and re invest them into other assets like bonds, etc. It is because, increasing interest rates would simultaneously increase the bond yields too.
In India, FIIs are finding huge growth prospects. So they start to invest. In comparison with China, it seems that India has increased the wealth of foreign investors. These FIIs have invested a huge sum into the Indian markets.
So, when the Fed Reserve decrease their rates, those investors would find an asset other than bonds to invest in so as to maximize their returns. The main reason for this is, decrease in Fed rate would result in declining treasury yields. This makes investors to shift from treasury to other assets like stocks, gold, etc.
Finally, if the Fed decides to cut the rates the Indian stock markets might jump.
Comming back to US inflation data:
So increase in inflation made many investors to anticipate that there could be a delay in rate cuts. But, there can be only a mild correction as of now because many fund managers feel that other than a few sectors all others are in correct valuation.
What happened to gold price:
As of now the gold prices are not expected to decline sharply because of geopolitical tensions. However there can be price corrections.
Conclusion:
Even now the VIX is not high. It indicates that markets are stable as of now. So we can expect only a mild correction as of now. But any other future news, events or something like that might impact stock markets. But we expect that, even though there is a crash the Nifty would not fall below 21,000.
All these forecasts are just expectations donot believe it to happen actually.
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