Reasons Not To Worry About Another Stock Market Crash

 The RBI reports have confirmed that the stock market is in a bubble. And, not once but twice Mr. Shaktikanta Das, the governor of RBI has told the press. However, the market has discounted the update and made new highs. As far as economy and inflation are concerned, the market is reasonably at a higher valuation. 

Having said that, one should always remember that the stock market discounts the past data and always focus on the future. However, the rally in the stock indexes is majorly due to the money printing that has happened to survive the economic slowdown Covid-19 had created.

This has also led to an increase in the inflation rate. However, as per the Federal Reserve(FED) in the U.S and other Government bodies, inflation is transitory. And, is due to a shortage in supply. Therefore, it is expected that it will settle down once the economy opens up. 

Moreover, due to the economic disruption, the Government has decreased interest rates on Government bonds. Which in turn has increased the money inflow in the stock markets. However, the FED has given a red signal to the rising inflation rate and has been said to increase the bond-interest rates if the inflation does not come under control.  

Now let us connect the dots and see, how does a market crash? 

Whenever the FED decides to increase the interest rate, money from the equity market will flow into the bond market. This outflow of funds can bring some correction in the equity market. And, this correction is amplified into a crash when the majority of traders perform margin trading.