If you are faint-hearted, financial markets could scare you right now. There is volatility due to everyday buying and selling of shares, bonds or commodities. Then, there is volatility, as we are witnessing now. It is a peculiar situation triggered by uncertainty. Financial markets wobble when they do not know what lies ahead. It is essential to know that you are a saver and an investor. The uncertainty that affects financial markets worldwide is bound to create doubts in your mind. You need to follow lead indicators that could help you make sense of the situation and take appropriate action.
Inflation and Interest rates
If you are a saver, your money is influenced mainly by inflation and interest rates. The latest monetary policy update from the Reserve Bank of India expects inflation to hover around 4% for 2025-26. That is lower than the average consumer price inflation in India of 4.7% in 2024-25. You need to observe the yield curve in the bond market to get a sense of the direction. Trillions of dollars move across bond markets where yields indicate the economic outlook. The 10-year bond yields are a benchmark in a well-functioning government bond market. India is witnessing a benign trend in bond yields as the market buys RBI's projections for inflation. If there is a risk of inflation, bond yields tend to rise. In the US, yields are rising sharply due to risks of a bond selloff. Globally, it is currently a significant risk for the financial system.
Countries like Japan, China, and Britain hold high-denomination US treasury bonds. There are fears that China could use them to stall the US strategy of imposing tariffs. To some extent, that worked when, at the last minute, the Trump administration allowed a 90-day relief to countries on tariffs except China. However, the 10-year bond yields are rising as the risk to the US economy continues. That hurts the equity assets in the US as they share an inverse relationship. The volatility in the US stock market has been at its highest level since COVID-19. If global interest rates remain elevated, it will also be hard to see any rapid interest rate cuts in India. In an interconnected world, India's economy cannot move in the other direction.
Economic Growth and profits
India's annual economic growth will likely remain at 6.5% for the next few years. Despite the turmoil in global trade, there is no significant revision in the growth prospects. While exports could be affected, it helps India not to be an export-centric economy. India needs to grow faster than it is growing now to meet the needs of the surging population. A global slowdown due to a trade war could stall the march and business growth. Indian companies seem to have been using capital more efficiently and generating steady returns for a long time. An analysis by DSP Mutual Fund shows that India's 20-year compounded annual growth rate for earnings per share (net profit per share) is the highest at 9% compared to 6% for the rest of the world, 7% for the US and 6% for China. That means companies' profits in India are growing the fastest among major countries. That should keep foreign investors and domestic investors interested.
The latest mutual fund data from the Association of Mutual Funds in India (AMFI) shows a sharp cut in systematic investment plan accounts in March 2025. These are primarily equity-linked mutual funds. That is counter-productive if you are trying to do retirement planning. You must stay invested and ride through the stock market cycles to create wealth and beat inflation. Share prices move in line with profits. Presently, they are affected by factors beyond corporate performance.