Timothy Sumer

How the hike in inflation rates affects stock market returns? #inflation #interest #purchasepower We have seen that a rise in inflation drives monetary authorities to raise interest rates. Increases in interest rates result in a shift of assets from equity to debt, as the risk-reward ratio changes. Here’s how: Let’s say a debt instrument previously offered returns of 6% p.a. and is now offering 8% p.a., due to an increase in interest rates. Suppose equity returns remain constant at 15%, the risk-reward ratio has gone down from 2.5 times (15%/6%) to 1.9 times (15%/8%). As the interest rates keep on increasing the risk-reward ratio keeps dropping and this is one of the main reasons why investors shift from equity to debt. Due to recent rake hikes, even FIIs have been redeeming a higher amount from Indian Equity Markets. If we consider the last six months, from February 2022 to July 2022, FIIs have redeemed to the tune of INR 1.79 lakh cr whereas in the six months previous t...