Sipping your morning tea and reading about the big fall in stocks, the Indian rupee and the global markets?
You will encounter some heavy stuff out there today. Don’t just drop the papers. Let the maid turn off the milk on a boiler, grab another digestive cookie and continue reading the newspapers. For the Great Gruhini’s Making Sense Guide will help you decode the heavy stuff.
The Indian stocks fell because…
A big bunch of investors from other countries (foreign institutional investors), having fat bank balance, sold their stock investments in India. Remember the first economic class lesson: more sellers in a market than buyers, the prices fall.
Markets experts say they suffered losses on their investments in Russian markets that’s why they wanted to sell or encash the gains made on their investments in India. Ditto for the big crude oil producing companies. They earn half of what they earned by selling oil. So they sell their investments elsewhere.
The Indian Rupee fell because…
When foreign investors want to invest or take out money from a market, they do so in the globally accepted currency for trade and investments, US dollars. So they want to take away their dollars after selling stocks.
The same economic principle applies here too: demand for US dollars increased vis-a-vis its supply so you need to shell out more rupees than before to buy a US dollar. Till few days ago, a US dollar could be bought at Rs 62.73 but on Tuesday, you needed Rs 63.54 to buy a dollar. In technical terms, the rupee has been depreciating in value against a US dollar.
the currency value also depends on the amount of US dollars demanded by importers and exporters.
There is Panic everywhere because…
Our stock, currency and bond markets are inter-linked to other countries’s markets. The big investors and the governments of other countries invest their money in different countries. If one country like Russia raised its interest rates from around 10% to 17%, value of its currency fell, investors suffered losses, got in panic mode and sold off their investments not only in Russia but other markets like India too.
Should you panic as well…
Not at all. As market experts have said in news reports here, there is nothing wrong with our country. So don’t panic like those big investors did. What the experts are saying is that yesterday’s losses will be recovered if you stay invested for a long haul.
I am sure that by the time you finish reading newspapers, you would have had three cups of tea.
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