Why diversification is still the best game for India’s retail investors
US Federal Reserve said that it expects the federal funds rate to be at 4.6% by end 2024 and lower thereafter, down from the earlier forecast of 5.1%. The federal funds rate is the rate at which banks in the US lend money to each other on an overnight basis. The rate currently stands at 5.25-5.5%.
If the Fed cuts this rate 25 basis points at a time, it will have cut the rate thrice for it to be at the projected level. One basis point is one hundredth of a percentage. Now, how does all this impact the Indian retail investor? With the funds rate being projected lower, the Fed is trying to tell the world that it expects the interest rates in the US to come down.
Lower US rates mean that large institutional investors will earn lower returns on their US fixed income investments. So, they’ll look for higher returns across the world. In fact, foreign institutional investors (FIIs) have already been doing that, given that they were banking on the Fed cutting interest rates in 2024.
From 1 December to 15 December, they have net invested ₹42,733 crore, or $5.13 billion, in buying Indian stocks. And this is why the BSE Sensex, India’s most famous stock market index, has risen 6.7% since the end of November and up to 15 December. The FIIs had sold stocks worth ₹39,316 crore during September and October, a period during which domestic institutional investors (DIIs) net bought stocks worth ₹48,567 crore.
DIIs are firms like mutual funds, insurance companies, pension and provident funds, banks, etc. Much of the money they invest is handed to them by retail investors. Now, it’s only because of massive FII buying, along with some buying by the DIIs, that stock prices have rallied.
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