If one were to compare India's equity markets to something on this year's Diwali, which is celebrated by millions of people as a festival of light and prosperity, then it wouldn't be anything less than a strobe rocket.
Major equity indexes in India have skyrocketed spectacularly, fired by mega-liquidity pushed into the financial system by the Reserve Bank of India (RBI) and also a sustained inflow from foreign institutional investors.
A day before lockdown was imposed on the whole of India on 25 March, the benchmark 30-share index of the Bombay Stock exchange plunged to the 25,981 level from the high of 41,925 it reached on 17 January. It wiped off almost $133 billion of investor wealth in a single day.
Since then, the Sensex and the other major index, the National Stock Exchange's Nifty, have shown a spectacular rise. Sensex has since recovered and is trading above the pre-COVID peak at above 43,357, and the Nifty has also regained its positions from the March low of 7,610, trading now at 12,690.
Apart from equity, the yellow metal has also gained some sheen as experts believe that gold is a good hedge against uncertainty. No wonder the precious metal has galloped to INR 50,505 ($680 approx at current prices) per 10 grams from INR 39,872 ($530) on 3 January this year, according to data from the India Bullion and Jewellers Association.
However, with so much money in the system as an consequence of the Reserve Bank of India (RBI) reducing the key lending rates to fight the effects of the pandemic since February this year, there has also been a casualty.
The banks' fixed deposit (FD) rates have come down drastically. For instance the fixed deposit rates of India’s largest lender State Bank of India have fallen to about 4.9 percent from slightly above 6 percent a year ago. Also, the interest rates on the post office deposits as well as the government's public provident fund (PPF) have also contracted.
This Diwali, if one were to take an investment decision this year, where should one funnel one's money? On the one hand, there are the stock exchanges and gold, which are enjoying a bull run, and on the other hand, traditional FDs are losing their gloss.
Analysts believe that the markets are in an overbought territory and value equity picks for the long term - along with a mix of blue-chip mutual funds - and gold could be a good option as fixed deposits in banks and post offices are no longer lucrative.
Financial journalist specialising in stocks and mutual funds, Geetu Moza, told Sputnik, “It is true that the bank and post office fixed deposits are no longer lucrative. Investors may opt for blue-chip mutual funds and stocks for the long term. Gold also can be a good hedge. Sustained investment in PPF can also fetch higher returns in the long run.”
Kishore Narne from brokerage house Motilal Oswal said in an interview with a local business news channel, “Gold is likely to see a level of INR 62,000 ($831) per 10 gram in the next one-and-a half years. A 20-25 percent return in the current scenario is not bad.”
Market players say that gold buying is visible. “Jewellery buying is high. Light-weight jewellery is being bought. Festive season and marriage demand are pushing sales,” said Surendra Mehta from India Bullion and Jewellers Association.
Negative Rate on Bank FDs
A banking sector representative pointed out that since inflation in India is soaring, investment in FDs will fetch negative returns.
The banker told Sputnik on condition of anonymity, “Retail inflation in India is hovering a kk 7 percent, while the FDs from different banks offer returns in the range of 4.9 percent to 6 percent. This will fetch negative returns to investors”.
He, however, stated that for those who want fixed returns, corporate debt instruments could be a better option and may provide better returns than bank FDs. “But one has to be cautious about the rating of the corporate bond that one is choosing”, he added.