There is never a dull moment when it comes to the equity market. However, ever since the corona virus pandemic hit the world unexpectedly, the markets have turned extremely slippery. As if the pandemic was not enough, the equity market now has to deal with a geopolitical situation that has stirred the commodity prices in such a way that we have already witnessed some record-breaking moves in metal prices, such as those of nickel. Owing to a massive short squeeze, nickel prices jumped to USD 1,00,000 a tonne and the London Metal Exchange had to halt trading.
Meanwhile, crude oil price is seen trading comfortably above USD 100 per barrel. Exactly a year before, crude oil was trading at USD 60 per barrel. India being one of the largest importers of crude oil, it goes without saying that any rise in crude oil prices is most detrimental to the Indian economy. We can only hope that the crude oil prices do not sustain over USD 100 per barrel for a long time. And with the prices of steel, copper and aluminium also caught in an upward spiral, the price rise trend is seen to be gaining momentum in 2022 as well. As such, inflation is the biggest casualty of the emerging ground reality.
One of the most important objectives and goals of the Reserve Bank of India (RBI) is to manage the inflation rate. This crucial responsibility implies allowing the inflation level to increase only to the point where it does not start impacting economic growth. The volatile situation can be accounted for by the current geopolitical situation. A huge spike in inflation can only be tamed with an increase in interest rates. But if the interest rates are increased, this may impact economic growth negatively. From the perspective of the equity market, rise in interest rates can be one of the most negative developments.
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