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In its latest meet, the Reserve Bank of India's Monetary Policy Committee delivered a rate hike along expected lines as did central banks across the world. Growth and inflation too seem to be meeting forecasts and comforting investors. Moreover, the recent December quarter results show an improved earnings trajectory. In spite of this, India’s equity benchmark Nifty 50 is up by less than 2 per cent from its year-ago level.
What’s spooking investors? Stability on domestic terrain is perhaps masked by overseas developments. A tighter-than-desirable labour market in the US could mean more tightening and more rate hikes there. This, in turn, can adversely impact capital flows into emerging markets (EMs).
Another concern is whether China’s recovery will impact foreign portfolio flows into Indian equities. To be sure, economists are united in their view that China’s recovery after reopening of its economy has come earlier and faster than expected. Not just manufacturing, even household consumption and services are improving as fears of COVID resurgence have receded. This FT article (free for MCPro subscribers) explains why global investors snapped up a record $21 billion worth of Chinese equities this year. The country’s benchmark CSI 300 index of its biggest companies has risen more than 13 per cent since the end of October, states the report.
However, China’s growth alone is not the only reason why Indian equities are still jittery. In this exclusive interview with MC Pro, Venugopal Garre, managing director at Bernstein, says that high valuations become a key stumbling block for more inflows and India sports some of the highest valuation companies in the world, even relative to the growth on offer.
Meanwhile, assuming growth is on track as underscored by the latest RBI’s policy meet commentary, some shadows of inflation still loom over the domestic economy. The Monetary Policy Committee said, “Headline inflation, excluding vegetables, has been rising well above the upper tolerance band and may remain elevated, especially with high core inflation pressures. Inflation, therefore, remains a major risk to the outlook.” Read this article to understand how far past rate hikes have helped in taming inflation.
If inflation continues to rule above the central banks' tolerance limit, then further rates cannot be ruled out. Garre points out that our rate cycle is a function of inflation and what the US does. “We consider 7 per cent as the peak for repo rate in this cycle,” he says, given that it is now at 6.5 per cent. Certainly, this means higher cost of funds, besides other ongoing cost pressures from supply chain disruptions and commodity prices that are not yet firmly behind us. These factors certainly weigh down investor sentiment.
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Vatsala KamatMoneycontrol Pro