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Do you see major inflation concerns due to the spike in commodity prices following the Russia-Ukraine war?

Oil prices remain the single biggest short-term risk for India. Elections in Uttar Pradesh has meant that pump prices have not increased since the excise duty cut in November despite Brent prices moving from around $80 a barrel to above $110 a barrel currently. Even if central and state governments cut excise duties by Rs 10-15, retail prices will rise. Given the inflation concern, we may see oil companies being forced to take some of the burden to shield the consumer price increase.

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The other worry on inflation, which may impact the CPI basket, is the fertiliser prices. India's delay in procurement last year has meant higher cost of purchases. The conflict in particular impacts the key fertiliser inputs. Again, either there is some amount of pass through or the government subsidy burden rises.

The third impact would be on domestic administered gas prices (APM). They are set to rise sharply, based on the agreed gas price formula in April 2022. This would have a direct immediate impact on the pricing of CNG and Piped Natural Gas impacting retail inflation.

If tensions settle, you will see some cool-off in commodity prices, however, it is still expected to remain higher than the previous year levels.

If India has a good monsoon, we may be able to manage food inflation, however, we may have to live with higher WPI and CPI inflation for some time to come.

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Global markets have been shaken by the Russia-Ukraine war. Do you think markets have discounted the event and are looking towards the US Federal Reserve meeting in mid-March?

I find it rather difficult to make an assessment, given how little we know about the intentions and the limited information that we have. Markets seem to be reacting to the daily changes in the status and thus we can't say that the current prices discount the eventuality. The current assessment seems to be that if other nations do not get militarily involved, then from a geo-political perspective, the impact on markets could be contained.

Most experts and futures markets indicate six-seven rate hikes by the Fed over the next year. Do you expect the Fed to start hiking policy rates in March after inflation in the US hit a 40-year high in January?

The US Fed meeting remains significant and the markets are pricing in rate hikes. If anything, the threat of persistent inflation has only increased. Given how tight the US labour markets remain, the Fed will hike (rates) despite the current tensions. Inflation is a politically sensitive thing in the US and given the outlook, the US Fed will be forced to act to display its inflation-fighting credibility.

We see the US Fed funds move from 0 percent to about 1.5 percent as just a process of normalisation and we expect to see this level in a year's time. Above that level, would depend on the growth impact of this geo-political event, given the increase in commodity prices. As things stand now, the US Fed seems to be on a long rate hiking cycle.

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Will sanctions against Russia have a major impact on global growth?

The threat to global growth is from high commodity prices. There is war-premium built up on spot commodity prices currently, but most curves are in backwardation (meaning future prices are well below current prices). If the conflict cools down, we should expect a decent correction in sensitive commodities like oil, gas, coal, some food prices, certain chemicals and resources. The sanctions have not touched oil and gas supplies yet, which is a good outcome. If the situation drags on, it will most certainly impact global growth.

A dragged-on situation is challenging for India as well in the short term. If oil prices sustain above $100 a barrel, we may see an impact on the Indian rupee and bond yields, given the likely increase in India's current account deficit. High foreign exchange reserves will buffer this impact to some extent.

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Is the Indian market, which has corrected more than 10 percent from record rallies of October, still valued high, considering the corporate earnings risk in terms of the margin pressure amid elevated commodity prices?

There may be near-term risks of rising input costs impacting margins. However, India is at an early stage of a strong economic upcycle after eight years of slowing economic growth. We expect companies to eventually pass on rising input costs. In a scenario of rising corporate profitability and relatively easy liquidity, it is unlikely that market valuations will see a significant correction.

However, over the next few years, we expect earnings growth to outpace equity market returns, which will lead to a natural correction in valuations.

Can you name the sectors that you are overweight on, especially in the geopolitical tensions-led correction?

Given our thesis of a strong economic upcycle, we have large weights in consumer discretionary and financials where we find valuations to be comfortable.

We have seen a steep correction in new-age tech companies that listed last year. Should one buy these stocks now?

Despite the correction, valuations still remain elevated in these companies. Some of these companies have to prove that they can sustain their business models without requiring a continuous injection of large capital. They also need to have a plan to generate sustainable profits. We continue to track their evolution but do not have any exposure in this space.

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