When interest rates fall, shares tend to move in opposite direction. In India shares prices have fallen with the Sensex at a near 13 month low and interest rates have followed.
A year back it was easy to get an interest rate of 9.25 per cent on a deposit at State Bank of India. Today, the maximum interest rate that one can get is 8 per cent.
Choosing between shares and fixed deposits?
The question now is: If both are falling where to put money. In 2015, the Sensex has thus far given negative returns. On Jan 1, 2015, the Sensex closed at 27,507 points. We are nearly 2000 points below those levels at Thursday's close of 25,622 points. Many analysts see the Sensex EPS at around 1450 for the financial year 2015-16. This translates into a price to earnings ratio of around 17.6 times one year forward earnings.
This makes Sensex valuations at long term averages, which means it is fairly valued at current levels. So, after a nearly 14 per cent fall on the Sensex from the highs of 30,000 points in March, the markets are still not a screaming buy.
Hence, if you think that after the fall you should be buying shares at these levels, you could certainly nibble selectively as the valuations are fair. Selective purchases can be done and if there is a further reaction in stocks of around 5-10 per cent, it would be an excellent opportunity to buy into blue chip stocks like ICICI Bank and Tata Motors.
If you have fixed deposits which have been placed almost a year back at interest rates of 9.25 per cent and more for the longer term, it would be unwise to break them and put money in shares, since these have been locked at high interest rates.
If you want to buy shares you can start nibbling selectively and in case the market falls lower from here, you can keep buying stocks at lower levels and averaging your costs.
Please do not buy shares in large quantities until the US Fed meeting ends on Sept 17. This would give you a clear indication on where interest rates are headed in the US. If there is a hike in interest rates in the US on Sept 17, you could see massive sell-off in Indian markets. This would give you an ideal opportunity to buy into shares.
For the time being just hold onto cash for at least a week.