Softer US CPI tailwind for Indian share market; expect FIIs to return, financials, auto to outperform

The US CPI for October came in at 3.2 percent, under the Street’s expectations of 3.3 percent.

The NSE Nifty 50 and BSE Sensex jumped over 1 percent each on November 15, fueled by the lower-than-expected US inflation data, sparking optimism that the US Federal Reserve might soon start reversing the interest-rate hikes.

Going forward, expectations of lower inflation and interest rate cuts will provide further strength to Indian equities that are already on a strong footing due to sound fundamentals and macroeconomy, said experts. The US CPI for October fell to 3.2 percent, below the Street’s expectations of 3.3 percent.

“Over the short term, lower rates will drive bullish sentiments for domestic markets as the probability of peak rate cycle is high, thus leading to more fund flow activity for Indian markets. Similarly, over the medium to long term, as many developed economies struggle to grow their economies, the Indian markets may outperform on account of strong fundamentals and favourable growth environment,” said Vaibhav Shah, fund manager, Torus Oro PMS.

“Indian markets are on a very stable footing and remain an island of stability in the volatile global macroeconomic scenario,” said Nishit Master, portfolio manager, Axis Securities PMS.

As of 12.30 pm, the broader Nifty 50 was one percent higher at 19,638.05, while the 30-share Sensex was trading at 65,533.44, up 0.92 percent.

Now with softer inflation print, expectations are high that the peak of the rate cycle is reached which may lead to a Fed pivot and bring down the interest rate and effective yields, said Vaibhav Shah. Wall Street rallied sharply on the back of this update, while the 10-year Treasury yields slipped under the 4.5 percent level.

Also Read | Rupee strengthens most in two months as US CPI softens

The low yields ensure a lower cost of equity, which in turn, can lead to higher multiples for global markets, especially emerging markets, including India. The weakening Dollar index further acts as a tailwind for inflows to the Indian markets.

Will FIIs return to domestic equity markets?

Across analysts, the consensus remains firm that the falling inflation print is a positive for the markets as FIIs might relook at Indian markets. Lower yields across developed economies, strong reforms, and favourable business policies will prompt FIIs to invest in Indian markets, said Shah.

VK Vijayakumar, chief investment strategist at Geojit Financial Services said FIIs are likely to turn buyers, lest they miss out on the rally. The tug-of-war between FIIs and DIIs, which can be seen in Indian markets, is clearly in favour of DIIs. If the interest rates in the US continue to fall or stay benign with inflation under control and weaker USD, then we could witness significant inflows from global funds, especially from the US, added Nishit Master.

Also Read | Wall Street, European stocks soar after soft US inflation data

Which sectors will benefit?

Interest-rate sensitive sectors usually tend to benefit from lower inflation prints, so sectors such as capital goods, auto and banking should do favourably.

Consumer discretionary, real estate and automobile-related stocks should benefit from the change in interest rate trajectory from a medium to long-term perspective, said Manish Chowdhury, head of research, StoxBox.

V K Vijayakumar said that leading financial counters, which were weighed down by FII selling, will bounce back, adding, “Financials, automobiles, real estate, cement and platform digital companies will attract investment from DIIs, HNIs and retail investors.”

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