The prospect of higher interest rates has cast a long shadow over equities. The latest jobs report in the US suggests that higher wages will feed inflation even as monetary policy is being normalized. Share prices have taken a beating on Wall Street.
The story is only somewhat different on Dalal Street. Bond yields have climbed on fears of resurgent inflation as well as questions about the ability of the government to stick to its fiscal targets. Indian equity prices were hammered on Friday.
The underlying economic news continues to be good. The global economy is in the midst of its first synchronized expansion since the financial crisis nearly a decade ago. India too is bouncing back. The early corporate results for the third quarter also offer some hope.
The current correction was overdue given how share prices had run ahead of economic fundamentals. Bond yields and share prices are once again moving in opposite directions. The equity premium is being compressed. This is not necessarily bad news for the long-term health of the market.
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