Commonly Asked Questions Related to the Financial Market

**1. Why fed reducing its rate impact the Indian market?** => The U.S. dollar is the world's reserve currency, and its value hinges on trust in the U.S. government and economy. When the Federal Reserve reduces interest rates, it lowers the returns on dollar-based assets. This often leads to an increase in liquidity as borrowing becomes cheaper in the U.S. However, if they later increase interest rates or issue higher-yielding treasury bonds, global investors are attracted to these safer, high-return options. This "**risk-off**" sentiment often prompts Foreign Institutional Investors (FIIs) to sell their holdings in riskier emerging markets like India, leading to a fall in indices like NIFTY. **De-dollarization:** The global over-reliance on the dollar means any fluctuation in its value impacts inflation worldwide. **2. Are FIIs selling because they’ve found better opportunities in countries ?** =>Think of Foreign Institutional Investors (FIIs) as travelers looking for the best vacation spots. They will choose destinations based on safety, attractions, and how much value they can get for their money. Similarly, FIIs decide where to invest based on geopolitical stability, trade policies, and economic conditions. **Geopolitical Factors (Safety & Stability)**: Imagine you are planning a trip. Would you visit a country in the middle of a conflict or political unrest? Probably not. FIIs think the same way. **Example:** When Russia invaded Ukraine, many investors pulled out of nearby countries because war creates uncertainty. Supply chains were disrupted, and energy prices soared. This instability made these regions less attractive for investment. **Trade Policies (Rules of the Game):** If a country introduces strict rules or high taxes on foreign companies, investors may feel unwelcome and look for friendlier options. ( eg: Nirmala Tai, i dont blame her, she is a puppet ) **Example:** In 2020, the U.S.-China trade war led to increased tariffs on goods. Many investors reduced exposure to Chinese markets and looked for alternatives like Vietnam or India, which had more favorable trade terms. **Economic Stability :** Investors prefer countries where the economy is growing steadily, inflation is under control (thats why they dont invest in PAK stock exchange), and the currency is stable. It’s like choosing a place with good infrastructure and amenities for your trip. **Example:** If India reports high GDP growth and stable inflation, it attracts more FIIs. On the other hand, if inflation rises sharply or there’s political turmoil, like in Sri Lanka during its 2022 economic crisis, FIIs will exit to safeguard their money. **3. How Does Crude Oil Affect the Market?** =>Crude oil is often called the "lifeblood of the global economy" because it powers transportation, industries, and much of the modern infrastructure. Any bottlenecks in its supply or a sharp rise in prices can significantly impact global markets**.** **Crude Oil is Inelastic in the Short Term:** **Inelastic Demand:** People and industries can’t immediately reduce their reliance on oil. For instance, you can’t stop using your car overnight or replace oil-powered machinery quickly. **Example**: During the Russia-Ukraine war in 2022, oil prices skyrocketed, yet countries continued importing because their economies depend on it. Even at $100+ per barrel, the demand didn’t fall drastically. **High Dependency, Low Alternatives:** Unlike luxury goods, oil has limited substitutes. Electric vehicles or renewable energy sources are alternatives, but their adoption takes time and investment. **Example:** When Middle Eastern conflicts disrupted supply, countries couldn’t switch to alternative energy sources instantly and had to pay higher prices. **Supply Shocks Magnify Price Increases:** When supply reduces (e.g., due to sanctions or wars), the limited availability of oil drives up prices sharply. With demand staying constant, this creates a price spike. **Example:** The 2022 sanctions on Russian oil reduced global supply, causing prices to surge. Countries like India and Europe still needed oil, so they paid the higher price. **Global Impact Amplifies the Effect:** Crude oil prices are set in global markets, so disruptions in one region (e.g., Middle East wars) affect prices worldwide. Even non-conflict regions feel the pinch. **Example:** In the Gulf War of 1990, oil supply disruptions caused global crude prices to double, even in countries far from the conflict. **Why Demand Doesn’t Decrease Even if Prices Rise ?** **Essential Nature:** Oil is used for transportation, manufacturing, power generation, etc., making it indispensable. **Delayed Response:** Over time, high prices may push people to adopt fuel-efficient cars or renewable energy, but this doesn’t happen quickly. **Economic Trade-Off:** Governments often subsidize oil to keep prices stable for consumers, indirectly sustaining demand. For crude oil, the typical “**price increases → demand decreases**” rule doesn’t apply because of its essential nature and lack of immediate substitutes. This makes markets highly sensitive to supply disruptions, leading to price surges that ripple across economies globally. **4.  Why isn’t the regulatory body like RBI doing anything to prevent investors from leaving?** **=>** Just like you won’t invest in a chit fund unless it’s transparent and trustworthy, FIIs won’t stay in a market unless the economy offers stability, growth potential, and returns. Governments and central banks work on creating that environment rather than imposing restrictions, which would deter future investments. **5.  Why aren’t our domestic mutual fund houses investing in foreign markets to balance this?** => I want them to invest in crypto also :p . When Indian mutual funds invest in foreign markets, they need to convert **rupees to dollars (or other foreign currencies),** so you are circulating more rupee , to buy assets like stocks or bonds in those markets. This creates additional demand for the dollar and can lead to the following consequences: **Weakening of the Rupee:** Higher demand for the dollar causes its value to increase relative to the rupee, leading to rupee depreciation. **Example:** Suppose mutual funds in India decide to invest heavily in U.S. tech stocks. To do this, they convert large amounts of rupees into dollars. This conversion increases dollar demand, putting downward pressure on the rupee. **Inflationary Pressure:** A weaker rupee makes imports more expensive, especially for commodities like crude oil. Since India imports a significant portion of its oil, this could lead to higher transportation and production costs, contributing to inflation. **Foreign Exchange Reserves**: Large outflows of rupees for foreign investments could reduce India’s forex reserves, which the RBI uses to stabilize the currency during volatile times. To summarize, I've explained these dynamics using the basic principle of supply and demand ( what everyone chitchats supply ea demand wo) which governs much of the behavior in markets. PS: Since I’m preparing for the SSC CGL exam, I only have time to read one newspaper, which is **Indian Express**. However, make use of other resources like **Mint**, **The Hindu**, and various finance columns. I plan to gather insights and opinions from their finance sections and combine the most relevant ones to keep up-to-date with business trend. Dont have money to buy all of them, acha free me chahiye? You know the answer **If I have misunderstood any concepts, please feel free to correct me—after all, sharing knowledge is caring.**