US CPI blazes March Fed cut hope but blisters unlikely for India, earnings a bigger worry

The US inflation print for January came in higher than market expectations.

The hotter-than-expected US inflation print for January has scorched hopes of a rate cut from the Federal Reserve as early as in March. The US retail inflation has roiled global markets, triggered a sell-off in Indian equities on February 14. Analysts, however, do not foresee any major risk from high global interest rates for the Indian markets and see the correction as a knee-jerk reaction.

Rather, concerns over earnings growth and its impact on rising valuations pose a bigger threat to the momentum for Indian equities.

Global interest rates not the biggest evil

The US inflation print inched up 0.3 percent on a monthly basis in January, while on an annual basis, it was up 3.1 percent. Analysts expected inflation to increase by 0.2 percent on-month and a 2.9 percent on-year. In response to the CPI data, yields on US 10-year treasury bill rose to 4.31 percent along with a 0.6 percent spike in the dollar index.

While all this sounds like bad news for emerging markets like India, analysts are not too worried. Even though they expect some pressure on Indian equities in the next few trading sessions in reaction to the weak global cues and the adverse US data, they feel India's strong economic outlook, fiscal prudence by the government, sustained domestic and foreign institutional flows and consistently cooling inflation will safeguard it from the risk of high global interest rates.

Just a couple of days ago, India's headline retail inflation rate cooled down to a three-month low of 5.10 percent in January. Moreover, the stability of the Indian equity market at times of distress amid high global interest rates and geopolitical issues is also reflected in its clear outperformance in the past two years.

Vikas Gupta, CEO and Chief Investment Strategist of Omniscience Capital, believes that markets will wait for more US data like PCE data, employment data and the negative sentiment is likely to be temporary as previous employment data has been strong.

Siddharth Bhamre, head of research of Religare Broking, also seconded the view and doesn’t see any reason for prolonged correction in the Indian market as he feels one data point won’t change the medium-term perspective of FIIs towards the Indian markets.

Also Read | Sensex, Nifty fall nearly 1% on weak global cues; analysts expect selling to intensify

Earnings growth a bigger risk

While India's strong economic standing on the global stage is known, sluggish earnings growth is one major risk that poses the risk to derail the country's outperformance. Sluggish rural recovery, weak global demand, and lower levels of private capex are some major risks to earnings growth for India Inc.

AR Ramachandran of Tips2Trade also has a slightly bearish view on the India Inc earnings. "The results clearly indicate that there is definitely a slowdown in business and margins are being impacted, especially for consumer companies," he said.

While information technology majors are struggling with a weak macro environment which has prompted sharp cuts in their growth guidance, chemical and agri-input players have suffered from subdued global demand.

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FMCG companies, including bellwether Hindustan Unilever, have faced challenges of slow volume growth amid sluggish rural recovery while several banks bore the brunt of margin compression.

Index heavyweight HDFC Bank reported a key miss in net interest margins in Q3FY24 due to higher cost of funds. Even though the management expects pressure on margins to gradually bottom out over the next few quarters, analysts remain sceptical. The HDFC Bank stock has over 14 percent weightage in the Nifty 50 index, therefore, any weakness in the counter could impact the performance of the benchmark.

On the other hand, exuberance in PSU stocks is also a major concern as analysts at Kotak Institutional Equities believe the market is overly focused on near-term ordering and profitability while ignoring the large downside risks to medium-term profitability, business model challenges and disruption risks. Kotak Equities believes that the market is underestimating the downside risks in assuming large order inflows for an extended period of time and perpetually elevated margin/return profile.

"Over the last few days, the broader markets, which had run up sharply in a short span of time, have seen some profit-booking as some of the companies in that space have not come up with good numbers," said Siddharth Khemkha, research head at Motilal Oswal.

Also Read | How will higher US inflation affect Indian markets?

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