Foreign Institutional Investors (FII) have been displaying wariness about Indian equities for some time now. The ritual year-end outlook reports from most global banks tended to reflect that almost as a consensus. FIIs have pulled out close to $6 billion from the markets since the beginning of 2022.

Why do inflation and interest rates lead to contagion?

Globally, financial markets are being roiled by accelerating inflation – half a generation of investors have not known what high inflation looks like, in the US and Europe – and consequent expectations of higher interest rates. Increasingly hawkish statements from global central banks, especially the US Federal Reserve, are making investors wary of significantly higher interest rates in the months to come. Geopolitical risks, most recently in the form of Russian military exercise on its Ukrainian borders, have exacerbated inflation expectations, especially on oil and gas. Global investors are therefore nervous and are taking money off the table wherever perceived risks are relatively higher.

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Views expressed above are the author’s own.



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