The Russia-Ukraine Crisis has blown the air of the stock market. The stock markets showed a great recovery in 2020 after a major fall due to Corona. Now, the market seems to be losing the gains it has achieved in the last one and a half years. The Sensex has fallen more than 15 per cent in two weeks. The same is the case with the US stock markets. It seems that the Indian markets are in sync with the US markets. Investors are worried about the future. The question is what is going to happen next? An article in the English business news website Economic Times has the answer to this question. Let us know what this article tells.
There is a parallel between the current situation and the monetary policy of 1920. First the market boomed, then it collapsed. The Dow Jones crashed 89 percent between 1930 and 1932. This means that the central bank’s lapse in understanding the situation properly and taking timely decisions can have dire consequences. In times of crisis, the role of the central bank becomes very important.
Central banks sometimes make mistakes in understanding the situation properly. They feel that one or two small measures will be enough to bring the situation under control. But, this doesn’t happen. The problem persists and sometimes it takes on a more formidable form than before. Central banks then try to control it. This cycle continues. Changes in key interest rates act as a major weapon for central banks.
Changes in interest rates have a direct impact on the US equity market. Then, it has an impact on emerging markets, bond markets and even commodity markets. A similar pattern can be seen in the dot com boom of 2000, the crisis of 1987, the crisis of 1920 and the current crisis of 2021. In all these crises, the stock market rises for a year or two and then falls suddenly. It takes a while for the market to recover in most cases.
It is important for Indian investors to know that there is a close relationship between the global and Indian markets. Therefore, it is not correct to assume that Indian markets will not be affected by global markets. History and data give concrete indications of this. The Indian and American markets have behaved similarly in the last 10 to 15 years. Whatever decision the US central bank Federal Reserve takes, we will be seen to follow it. If the Federal Reserve makes a mistake, it will increase volatility.
American stock markets crashed 89 percent between 1930 and 32. Then the Federal Reserve missed the right step. As a result, it took two decades for the market to reach its highs. Therefore, prolonged liberal monetary policy can have disastrous consequences. The rise in stock markets due to credit (borrowed money) may end as soon as the situation changes. We can learn lessons from the events of history.
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