The Interest Should Shift Soon

Conventional thinking says that the markets should go up when the Central bank, RBI drops interest rates. This belief stems from the ripple effect that a rate cut will have by making loans cheaper, leave more money in borrower’s hands and help companies generate more profits. But, the recent rate cuts by RBI haven’t quite seen that happen with banks refusing to pass on any benefits and keeping rates high. The recent rate cuts virtually did little to change the ground realities. On Monday, RBI is not likely to cut rates. This should hardly matter as a cut would anyway not translate into much. The markets usually give a thumbs down and head south when rate cut expectations aren’t met. But, given the low expectations of a rate cut and little likelihood of banks passing on benefit a rate cut, there should be hardly much disappointment. Alternately, there could be some relief on the event passing.

Volatility doesn’t change the Value of stocks. It only moves prices.

Every asset is fallible when its valuations go well beyond reasonable levels and we all know it only too well. Ironically, assets tend to be bought the most only when they reach unreasonable valuations. Equity fell in 2008 when Indian investors bought 50000 crores in equity mutual funds that year. Ironically, they mostly bought infrastructure funds at sky high valuations using piles of money. Gold fell in 2013 just after most Indians bought it. After two successive failures of investment strategy, investors are praying that the last of their choices doesn’t come home to hurt. Home prices stand precariously as investors pray they hold. Investment failures can’t be stopped by prayers and they always happen when the price is wrong. Ironically, the price gets wrong only because we wait too long for the right price and lose patience exactly at the wrong time.

Ignore volatility. Focus on valuations.

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