US rate cycle, dollar movement to keep Indian equities volatile: Morgan Stanley

The US interest rate cycle and its impact on dollar movement could continue to bring volatility in the Indian equity market in the coming months, given its negative effect on earnings and balance of payments, says global investment bank Morgan Stanley

Steep rate hikes in the US and a slowdown in growth has increased the risk of the world’s largest economy entering into a recession. This does not bode well for India as, historically, domestic equities have entered into a bear market when the US slips into recession.

Further, Morgan Stanley sees risks of earnings downgrades from a slowdown in global growth in 2023.

“One way to offset such a risk comes from improving domestic capex,” the investment bank said in its report.

Amid steeper rate hikes globally, the only silver lining for India, according to Morgan Stanley, is that the Reserve Bank of India is likely to stay behind the US Federal Reserve given India’s improved macroeconomic stability.

But given the prevailing headwinds, “indeed, the only safe forecasts for the coming quarter are heightened volatility and higher correlations across stocks within the Indian market and with other markets around the world,” the investment bank said.