DAILY VOICE | Any tightening measures by RBI could hurt growth: Nischal Maheshwari of Centrum Broking

Q) What is your take on the MPC committee decision of the April meeting as well as future outlook?

A) The primary risk of COVID has re-surfaced again which will prompt the RBI to keep an accommodative stance in the April meet and ensure any premature withdrawal of liquidity doesn’t send a wrong message to the market.

The risk of COVID cases are still evolving and micro-lockdowns will hurt the sectors that cannot afford physical distance at work (e.g., labour-intensive sectors, hospitality/tourism etc). Hence, liquidity lines are still necessary for these businesses.

Right now, the economic growth recovery is stable, but it may get hampered if any kind of tightening measures are put in place.

Also, it will be the prerogative of the RBI to keep the short-term rates in check – expecting more Operation Twists. The current environment of negative real rates are beneficial for borrowers and RBI will continue to maintain so at least for the next 2 quarters.

Overall, we are not expecting any hike or tightening measures in this meet and 1HFY22 but some kind of tightening (reduction in bond purchases, not rate hike) can surface in late 2HFY22.

Q) Archegos fire sale does remind us that we still live in a world that is vulnerable to external shocks. Top global banks such as Credit Suisse and Nomura have been burned in the fire sale and stand to lose close to $6 billion. What impact the event could have on Indian markets and offshore derivative instruments?

A) Archegos fire sale once again reminded the world of the 2008 meltdown. Again the culprits were the options that carry unlimited and unknown risk.

At the moment the fire seems contained within US markets and we have not seen a contagion beyond US borders, so for the moment, we are safe.

But, we have to keep a sharp lookout if this has led to some other issues in other asset markets.

Q) What is the kind of impact you foresee on Indian markets post the announcement of a multitrillion-dollar plan to rebuild America’s infrastructure by US President Joe Biden?

A) This is a tricky situation. The quantum of US stimulus will put the US economy on the pre-pandemic growth path and the stimulus along with Fed’s accommodative stance has the potential to fast pace economic growth.

There is a threat to emerging markets since we will be importing tighter financial conditions, even when domestically the financial conditions are much loose.

India especially, may look at a scenario where the USD is stronger, the yields are high but not benefitting from US economic growth – stronger USD and rising yields will adversely impact Indian markets, where there will be capital outflow.

A point of comfort is RBI has huge FX reserves and can intervene to stem INR depreciation-but the intervention can’t be at high levels since it will hurt export revenue.

Q) Equity markets closed FY21 with gains of 70% but it happened on a small base amid the selloff seen in March 2020 due to the outbreak of COVID. What is your outlook on markets for FY22? Which asset class could outperform?

A) We are bullish on equities since economic growth recovery will largely remain on track provided there are no country-wide lockdowns.

Moreover, earnings are on recovery mode and there is a tangible improvement in the earnings outlook as well. However, there will be a downside pull factor due to rising actual and expected inflation and expectation of withdrawal in liquidity.

Hence we can’t expect an outlier year like FY21 repeating again, but the returns will be higher than all other asset classes.

Commodities had an excellent run in FY21 and will continue to do so as optimism in the global economy remains robust due to vaccinations and re-openings.

Q) FTSE Russell, a global index service provider, placed Indian government securities on its watch list for inclusion in its emerging markets government bond index. What is the kind of money which could come in from foreign investors?

A) India has witnessed outflow from debt markets for 3 consecutive FYs to the tune of USD 6bn. Our expectation of long-term stable inflow will depend on yield movement in the US, domestic inflation situation since fiscal deficits are now revised higher and how the rating agencies digest India’s expenditure plan. Else, the inclusion in the global index will be a one-off event.

Q) We closed March on a flat-to-positive note. How is April likely to pan out for investors? Any big events to track which could have a bearing?

A) Domestically, Inflation numbers, Covid cases, pace of vaccination, earning numbers will impact markets. External factors like US job numbers, inflation numbers, Fed’s policy, China PMI numbers, any guidance from PBoC, too will play a key role.

Q) Dollar near 5-month higher while US Bond Yields inch higher. What is the kind of impact you foresee on commodities? And, impact on commodity-linked stocks/sectors?

A) Impact of a rising USD and yields will impact Gold adversely. Long-term correlation since 2010 suggests a negative correlation of 34% between USD and gold while in the last 1 year -- that relationship has amplified to negative 60%.

Overall optimism regarding the pandemic and better macro data points will push USD higher in the medium-long term.

In the short term, rising inflation expectation can momentarily halt USD’s up move which can bring some up move in Gold but overall this effect will be transitory as inflationary pressures recede.

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