Indian Stock Market Updates : Indian stocks are likely to attract higher foreign investor inflows this year with the US Federal Reserve cutting its policy rate by a whopping 50 basis points-the first time in four years. Another 50 bps cut can be expected before the year ends. Analysts believe that though this development would eventually benefit foreign investments, steep valuations of many Indian stocks would prevent a runaway rally in Indian stocks. Large-cap players are going to outperform broader markets.
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Impact of the US Fed’s Rate Cut on Indian Stocks
The 50 bps rate cut by the Fed, which most analysts did not see coming, is likely to hit emerging markets like India quite hard. Over time, low US interest rates have tended to encourage FIIs to take advantage of the opportunities to borrow at low cost and invest in higher-yielding and riskier assets in EMs. Such action is often referred to as the “carry trade.”
Noting that large-cap banking and shadow banking as a segment could be outperforming the broader market, “which has shown profit booking in last few trading sessions”, Andrew Holland, CEO of Avendus Capital Alternate Strategies believes this trend might ultimately lead to increased foreign inflows into India. “A gradual rally is more likely,” Holland said.
Large Caps Expected to Outperform
The near-term outlook for large-cap stocks remains constructive on strength in the support from domestic institutional flows. Analysts also expect that by the end of the year, RBI may follow the US Federal Reserve and cut rates, which would further boost large caps, especially those in banking and financial services.
Small and mid-cap stocks would lag. The valuations are sharp, and profit booking in recent times has curbed investors’ energies, and large-cap stocks would offer a better safety bet for long-term growth in this market, as reported in the article.
Nifty and Sensex touch new peak
Indian stock markets mark new highs after the Fed’s cut rate announcement. The Nifty 50 index rose 0.9% and reached its new high at 25,611.95 on Thursday morning. The gains weren’t sustainable; the Nifty wiped out most of its gains to close a narrow 0.15% above at 25,415.80. The story was similar with the Sensex: it crawled up 1% to a new high at 83,773.61 only to pare its gains to finish 0.29% higher at 83,184.80.
Though Nifty and Sensex recovered marginally, they were well ahead of the major indices. The Nifty Midcap 150 fell 0.5% to close at 21,965.15 while Nifty Smallcap 250 slid 1.11% to 18,270.40. For the fourth time in a row, mid-cap and small-cap shares were marred by profit-taking.
Market Gains Driven By Banks
The biggest drivers of the gains in Indian benchmark indices were the banking sector. HDFC Bank and Kotak Mahindra Bank were two of the leading contributors to the rise of the Nifty, together accounting for 0.13% of the index’s overall 0.15% gain. Large-cap banks are likely to be some of the more significant beneficiaries of the low interest rates that have swept across the globe, where the cost of capital decreases and efficiency increases for financial institutions.
Indian Stock Market Updates : Foreign vs. Domestic Institutional Investor Flows
While even as the domestic institutional investors are pulling out foreign institutional investors’ pole position by a mile in terms of inflows, it has indeed been the foreign institutional investors who have dominated the Indian stock market’s performance this year. During the ongoing calendar year, ₹73,782 crore have been poured into Indian stocks in FIIs, a far cry from the ₹3.2 trillion pumped in by the DIIs. Local investors have been strong and supportive of Indian equity markets with the thoughts of foreign investors, which raise adjusted positions in the face of a global economic instability.
Ashish Gupta, chief investment officer at Axis AMC, believes that the Fed’s rate cut is important. “While it is a large 50-basis-point cut, the market had already reduced its expectation of a 100 bps reduction over the entire year based on the dovish stance of the Fed,” he said. Gupta pointed to the rise in the US 10-year bond yield, which increased 3 bps to 3.73%.
Valuations Raise Red Flags in Large Market Space
Analysts are starting to get worried at rising valuations on Indian equities, even as momentum generated by the Fed rate cut flows through. For example, Nifty 50 currently trades at a P/E multiple of 24.82 against its historical average of 24.73. The Nifty Midcap 150 is trading at a very high P/E multiple of 46.85, against its historic average of 36x. The P/E multiple of Nifty Smallcap 250, too, has been hovering at a tad higher level at 35.78, significantly above its historical average of 28.7x.
Large-caps seem overvalued on paper, but value investing could be pursued here too,” said Sanjeev Prasad, Kotak Institutional Equities co-head and Managing Director. While cautioning investors to remain cautious of the bigger market, Prasad said that small-cap and mid-cap stocks are still overvalued.
Rupee and Bond Market Reaction
The rupee edged up against the US dollar, up 7 paise at closing at 83.68 on the day the Reserve Bank of India announced its policy. In the bond market, India’s 10-year government bond yield moved up by 9 bps to a provisional closing of 6.87%. The increase in bond yields is in line with the views of many analysts, who comment that the US rate cut has already been priced into Indian markets.
RBI Rate Outlook: Waiting on Inflation Data
The cut in the US Federal Reserve rate has created perceptions about an RBI rate cut too, but most economists believe that the RBI of India will keep the rates unchanged in the near term. The RBI MPC is widely expected to meet later this month, and controlling food inflation – quite recently a major focal point of concern for the Indian economy – would be on top of the agenda. In any case, though, there is the possibility that the RBI goes ahead to cut its rates during its meet in December, especially if clear signs are indicated that inflation is beginning to ease.
“I do not think the MPC would lower the repo rate as a reaction to the US Fed cutting rates,” said Madan Sabnavis, Chief Economist at Bank of Baroda. Explaining this, he said that it won’t be enough for RBI to take a call. Governor Shaktikanta Das has already pointed out that the inflation trajectory will be a key factor before it would cut rates, rather than anything that happens in the US monetary policy.
Food Inflation: The El Dorado for RBI’s Rate Decision
There are not a lot of dissenting voices for economists that, the fallout of RBI’s rate decision later this year will crucially depend on food inflation. Dharmakirti Joshi of Crisil is no exception as he said food prices heavily influence India’s monetary policy. “Whether the Fed cuts by 50 bps or another 50 bps, if food inflation does not show signs of softening on a durable basis, the target of 4% inflation will be more difficult for the central bank to attain,” Joshi said. He noted that management of food inflation would be key to the RBI’s easing of interest rates.
To this list of factors, new members to the MPC are expected to be appointed in October; this should impact RBI’s rate outlook. The incumbent members joined in October 2020, and their replacements should have varying views on monetary policy. Some of the new members might view the actions of the Fed and how this is spilling over into financial markets around the world – very much a determining factor of future RBI positions.
Conclusion: A balancing act for Indian markets
While the rate cut by the US Federal Reserve would attract a lot more foreign investment into Indian markets, the steep valuations of small-cap and mid-cap stocks actually tell a story of caution. Once again, it is large-cap companies in banks which are most likely to be the primary beneficiaries of low global interest rates and large-scale inflows from institutional investors. While the decisions of RBI at the same time will depend much on data of inflation, food inflation will become the main factor to watch in the coming months.
High valuations and uncertain inflation trends will keep investors on their toes as they suggest higher volatility in Indian markets going forward. While the Fed rate cut has buoyed markets short term, it is its long term impact regarding how RBI responds to maintaining the balance of economy with checking inflation that matters.