Equities likely to keep up the rally riding on price drop in crude oil, commodities

markets

Indian markets may continue their record- breaking rally amid expectations the Reserve Bank of India (RBI) will pause interest rate increases as consumer price inflation moderates further following a recent drop in crude oil and commodity prices, analysts said.

The latest steep fall in oil and metal prices, along with plentiful sowing in both the kharif and rabi crop seasons, is certain to push inflation still lower in the next couple of months, the analysts added.

Continued buying by foreign investors is also expected to improve market sentiment. Since mid-October, foreign institutional investors have bought $4.64 billion of Indian equities. They had been net sellers since the start of the year until mid-October when they sold around $23 billion of equities.

In the last one week, crude oil dropped 9.38% to hit ten-month low of $83 a barrel from $94 a week ago. Other commodities like LME Aluminum fell 3.7%, LME Copper lost 7.8%, LME Zinc declined 8.4%, and LME Nickel fell 17.7% from last week. LME is short for London Metal Exchange.

Crude oil, metal prices drop

As of November 21, the global crude oil price has fallen by 32% from its recent high of $128 a barrel. Core metals like aluminium, copper have fallen 6% to 16% on a year-on-year basis.  In fact these metals have crashed as much as 35% from their 52-week highs.

"The sharp decline in crude and the declining trend in metal prices augur well for India’s macros," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

"Inflation is already slowing down and this decline in crude and metal prices will facilitate further softening of inflation. This means RBI can afford to take a less hawkish stand on inflation and interest rates" Vijaykumar said.

India’s retail inflation softened to a three-month low of 6.77 percent in October from 7.41 percent in September.

The Wholesale Price Index (WPI) fell to a 19-month low of 8.39 percent in October. WPI inflation was 10.7 percent in September and in October 2021, it was13.83 percent.

Credit growth, robust tax collection

Healthy credit growth, rapid economic growth and robust tax collections will provide impetus to equities to end 2022 at record-high levels, said G Chokkalingam. founder and Managing Director, Equinomics Research and Advisory.

Improving macroeconomic data, with the manufacturing purchasing managers index rising to 55.3 in October from 55.1 in September and the 3.09 percent expansion of factory output in September have spurred hopes of a further rally in local equities.

On November 18, the RBI said in its bulletin  that India’s Gross Domestic Product (GDP) is expected to have grown between 6.1 percent and 6.3 per cent in the June-September quarter.

“If this is realised, India is on course for a growth rate of about 7 percent in 2022-23.... with headline inflation beginning to show signs of easing, the domestic macroeconomic outlook can best be characterised as resilient but sensitive to formidable global headwinds,” the RBI report added.

RBI’s expected pause

Indian equity markets have been surging since mid-October. Both the BSE Sensex and NSE Nifty hit a record high of 62,052.57 and 18442.15, respectively, on November 16.

"We can definitely expect the RBI to pause or opt for a small hike in the benchmark interest rates. Crude oil is not only linked to inflation but also to the quantum of trade deficit, forex reserves and rupee exchange rate. Therefore, we can expect a favourable impact on the domestic equity markets in the next one month itself," said Chokkalingam.

RBI has raised its key repo rate by 190 basis points since May to douse inflation. One basis point is one-hundredth of a percentage point.

So far this year, both Sensex and Nifty have gained 4.5% each.

"Nifty is on track to achieve an EPS of Rs.820 in FY23. This journey will be smoother with better results from metal majors. On the valuations front, high valuations continue to be a concern,” Vijaykumar said.

He added: “Nifty is currently trading around 21 times FY23 earnings. The market cap to GDP ratio is at 107 vs the long-term average of 81. If there is a risk-off in global markets, Nifty too will correct."