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ब्याज दर (Interest rates) और शेयर बाजार (stock market) में एक प्यारा रिश्ता है। - YouTube
Channel: Vivek Bajaj
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In the video before this, friends, I had told you about
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how Nifty is creating a new base.
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and I had also explained this concept of how earnings of the companies in Nifty
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drive the movement of the Nifty.
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Friends, if you haven't watched that video, please do watch it .
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It will clear the concept well, and for my theory of the Nifty having the 11500 - 12000 base,
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this base has been created for a long term perspective.
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In the end of that video I had told you about the strong relation
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between the stock market and the interest rates,
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and that relation is also very important for you to understand.
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So in this video, we will talk about interest rates and the market.
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Friends, my name is Vivek Bajaj, & I have been involved in the market for the last 15 years
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& I am able to understand what is going on in the market.
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Friends, I want to show this sheet to you. This sheet is
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the old one which I had used in the previous video
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In that sheet, I also added the interest rate data.
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So if you see the interest rate data of the last 20 years,
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which I have plotted over here
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In the year 2000, the interest rate was 6.5%
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this interest rate that I am talking about is the bank rate.
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This is the rate that RBI defines, & the banks borrow at this rate.
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So 6.5% was the bank rate in the year 2000
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And in today's date, the bank rate is 4%.
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this means that the rates have fallen, but not only in one way, friends.
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The interest rates increased, then fell, then increased, then fell
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Why does this happen? Because interest rate is dependent on inflation,
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interest rate is dependent on the liquidity situation of the market,
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& interest rates depend on the general economic condition a lot.
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RBI, the supreme monetary authority of India,
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they decide what should be the interest rate. Why do they decide it?
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because if they want to affect economic activity in any way,
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they use interest rates as a tool to drive the economy in the direction they want
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Instead of that, let us now discuss on the stock market and interest rates,
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because right now that is the most important point to discuss for us.
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Friends, what I have done is, with the Nifty PE, I divided it by 100.
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What is the logic? What does PE mean? It is price by earnings.
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If we reverse this, what do we get? We get earning yield.
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How much money do you have to give to earn this money, that is the earning yield.
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So if I divide this, so see, the earning yield of Nifty and the interest rates
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somewhere there is a very good relation between the two.
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Now see, when interest rates fall, the earning yield falls too
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When interest rates rise, the earning yield rises.
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What is the undercurrent assumption of this?
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Hello, I hope you are liking my efforts.
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If you want me to record more such videos for you,
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then like this video and please share it with your friends,
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please subscribe to this channel and press the bell icon because
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the bell helps you know if I have released a video. Thank you.
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the under current assumption is that when the economic activity is booming,
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the interest rates will go up.
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& if rates are rising & the economy is doing well, it means the shares are doing well.
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and companies are making good profits.
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& if economic activity is doing bad then interest rate will go down
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& this means that the performance of the company is bad too.
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It's simple math. Now, if we look at today's scenario,
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the market's PE is 32.
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I had told you in the last video that the 32 PE is an aberration.
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Because of Covid-19, no work has been done in the past year.
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This situation has happened for the first time in 100 years.
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In a situation like this, companies earning 400 is a big deal.
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If you calculate the earnings in PE which is 32 and if you find the yield then it's just 3%.
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And if you find the interest rate then it is 4%.
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As the economic activity goes up, interest rates will go up and earnings yield will go up.
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So my assumption is that we need to take out this year’s PE from our mind.
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This year was an exception. We have to prepare for next year, and this is what the market is doing.
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So if I take an assumption of 15% for growth,
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then the market is saying that the PE which is 32, could return to its usual long term average
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on the basis of forward earnings, which is 20-22.
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This means that on low interest rates, the market always prepares itself,
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for a new boom, due to a lot of sectors which benefit from low interest rates
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be it automobile or real estate, or any other cyclical sector you observe,
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For economic activity to go up they play a major role.
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& for that, lower interest rates act as a catalyst.
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So what do we understand from this video? The right interpretation is that
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if you want to know the direction of the stock market, then look at the interest rates,
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because that is the biggest raw material.
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Because if interest rates will be low then markets will be booming.
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If interest rates rise then also markets will boom for a while
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but at a point the market will start to seem expensive,
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and it will become overdue for a correction.
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If you analyze the data, you will clearly be able to understand the trend
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and you will be able to create a macro view of the market on that basis.
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So with these two videos I must have cleared the concept for you
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about how Nifty is creating a broader base & how earnings are driving the market,
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& how interest rates and earnings yield are related.
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& with lower interest rates, lower earnings are justified,
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which means the high PE is justified and the market being expensive is justified too.
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I hope you have liked my video.
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If you want to talk to me, please comment, I will try to reply to it,
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and I will try to stay connected with you all.
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Do stay connected with my channel, thank you so much.
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