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Returns to investors during Stock Market Rally resulting in high Debt to GDP ratio

This week, the markets reached yet another lifetime high. The previous year was a dream for investors, as a benchmark and wider indexes maintained their pace. This trend was not limited to India but swept far and wide throughout the globe. The US and Chinese economies have seen some demand-led inflationary pressure. In India, on the other hand, inflation has risen over the 6 percent comfort level, owing primarily to rising gasoline prices rather than pent-up demand. This is an important aspect to consider because oil prices are likely to rise further owing to a supply shortage. Rising inflation is believed to be linked with a strengthening economy, and equities often do well when inflation is somewhat higher but not excessively so. This bodes well for the Fed's and our Reserve Bank of India (RBI) onerous position on not raising interest rates quickly. This time around, inflation and bond rates are in conflict, with the former rising while the latter is falling. Bond yields, both increasing and decreasing, elicit their own set of concerns. Furthermore, warning flags are emerging from everywhere, from a drop in GST receipts below the $1 trillion mark to an increase in India's debt to GDP ratio, which is currently at a 14-year high. While these macroeconomic indicators have shifted from a favourable to a negative economic outlook, one constant over the last year has been that markets have proceeded on their way without regard for the macros. Investors who were greedy when others were frightened, or who remained with the rise despite all the hoopla, reaped huge rewards. This teaches an important lesson about investing: staying involved through market ups and downs. IPOs continue to shine, and when combined with a bull market, the interest is heightened as promoters and private equity investors profit from excellent prices. Retail investors frequently misread oversubscription figures and become too enthused by the demand, ignoring the reality that just a tiny part of the overall issue size is allotted to retail, implying that supply is already limited.

Promoters and private equity investors stand to benefit from the IPO as long as someone is prepared to pay the asking price. This trend holds true for both individual and institutional investors who pursue IPOs for "listing gains," certain that they will find a suitable buyer at a premium after listing. The "Greater Fool Theory" proposes that people can sell at inflated prices as long as there is someone prepared to purchase at an even higher price (the greater fool). This cycle will continue as long as willing people continue to invest in equities.


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