Daily Voice | This market veteran expects rate cuts at the end of FY24, RBI to raise full year GDP growth forecast

The economic cycle in India typically hinges on the capital expenditure (capex) cycle, which has shown a positive upturn in recent years after a nearly decade-long period of slowdown. A political continuity will likely point to capex-driven policies and the investment cycle should continue to unfold over the next several years.

Regardless of the election results, a robust housing cycle is underway due to the prevailing strong demand-supply situation. We believe the fundamentals are strong and market momentum is likely to continue over the long term.

Q: Do you expect the RBI to sound hawkish at its upcoming monetary policy meeting on December 8? Further, will the central bank revise its GDP growth forecast upwards?

The Reserve Bank of India (RBI) pursued a modest approach to increase interest rates relative to advanced economies. The repo rate is currently at 6.50 percent, which is comparatively low when assessed against historical standards. Though Inflation spikes are a risk if tamed durably the economy is likely to sustain a stable growth momentum for a longer period. Inflation has been gradually declining but continues to remain above the targeted level, so we expect rates to be on hold and cuts to begin at the end of the fiscal year.

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The second quarter of fiscal year 2024 saw robust economic growth that exceeded expectations. The Gross Value Added (GVA) achieved a notable 7.4 percent increase, and the Gross Domestic Product (GDP) recorded a growth rate of 7.6 percent. RBI is likely to increase the GDP forecast for the year with H1FY24 GDP Growth coming at 7.7 percent.

Q: Are you confident enough that the interest rate cut will start in the first half of 2024, considering the current US economic environment?

Following the surge in inflation to its peak levels since the early 1980s, the Federal Reserve implemented a sequence of 11 increases in interest rates, bringing its policy rate to the highest point in 22 years, within a target range of 5.25 percent to 5.5 percent.

Rate cuts in the US now depend primarily on the progress of inflation and a slowdown in the growth outlook of the economy. It would be premature to expect rate cuts sooner unless inflation heads down to its targeted level.

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Q: After reading the US economic data including rising jobless claims, do you expect a slowdown in the US in 2024?

The year 2024 is expected to face economic challenges for the advanced economy, marked by geopolitical uncertainty and varying economic conditions in key regions. Lower economic growth and a gradual decrease in inflationary pressures are expected in the US with the aggressive hikes pursued by the central banks.

Q: Do you expect the domestic flows to remain strong in the coming year as well?

India’s economy has been growing strongly, with GDP expanding 7.6 percent in the second quarter of FY24 following a strong 7.8 percent growth on a YOY basis in the previous quarter. India Inc's earnings have grown healthy in the last two quarters.

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Domestic inflows have demonstrated resilience, remaining robust despite uncertainties at the global level. Investors are participating actively and progressively engaging in the markets and we expect this trend to continue as the economy expands and the earnings grow healthily.

Q: Do you see the optimism continuing in the primary market in the rest of the financial year too?

The surge in IPOs can be attributed to euphoria over the last two years and heightened global confidence in India's resilient economy. Investors are placing substantial bets on the promising growth potential of newly listed stocks, anticipating significant upside.

Following a relatively quiet start to 2023, the IPO market has experienced increased activity recently and given the robust pipeline, this trend is expected to persist. However, it is crucial to be cautious when valuations are excessively high, as there is a risk of companies seeking prices that surpass their reasonable valuation levels.

Q: One sector where you have a super bullish view going into 2024...........

We are optimistic about the building materials sector due to increased investment towards infrastructure, urbanization, and a recovery in the housing and commercial real estate markets.

The government has been investing heavily in transport infrastructure projects benefitting the real-estate markets across India, especially in Tier-2 and Tier-3 cities.

Plastic and metal pipes are witnessing robust demand.

Commentaries from management are upbeat on demand outlook on the back of the pickup in real estate, the government’s focus on housing & infrastructure, and industry consolidation. Companies are incurring capex aggressively or actively pursuing inorganic growth opportunities to cater to the demand. Paint companies are registering robust demand uptrends.

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