This is a bull case for the markets, the much-needed impetus after having factored in an array of negative factors. We are glad the RBI has taken a wide pause to evaluate the developments after eleven months of non-stop rate hikes. The strategy of keeping the powder dry is an exemplary gesture – something even the Fed has to look up to. The impetuous rate hikes we saw with the Fed created a havoc in the banking sector.
As the March FY23 quarter results are released from the banks, the RBI will have extensive data to examine systemic stress points and decide on the future course of liquidity provisioning.
Before this meeting, if you had asked me to detail the negative factors being priced into the markets, I would have gone on to write a book, and wouldn't have had any positive factors to pin point. Where we stand today, the biggest positive, respite of liquidity have approached the markets.
Markets were pricing in a 25-basis point rise in repo rates, and as we all know, market react to expectations. For markets, reality isn't reality, perception and anticipation are reality. This is why we say markets are forward looking.
The RBI has highlighted its focus on growth once again. The forward-looking guidance of 6.5 percent real GDP growth for FY24 is very encouraging, it maintains our trajectory of being the fastest growing major economy when other developed economies are peering into a recession.
This 6.5 percent growth is forecasted assuming other developed markets won't enter a recession, which is a concern. Moreover, the core inflation remains sticky and the RBI is ready to bend over backwards to fight inflation – we could see food prices further rising, which will prompt RBI to raise rates.
To add to inflation, OPEC+'s output cut of 1.16 million barrels per day by OPEC+ will put upward pressure on oil prices. Oil prices above $100 a barrel isn’t a threat just for inflation but current account deficit.
FPI flows are getting back into equities and moving out of debt as the recent data suggests.
When we look at specific sectors/categories, here is our outlook on the back of MPC meeting:
Banking
We foresee a strong relief rally in the banking sector. A pause in interest rates will be a positive for the banking sector at this juncture – even though it results in peaking of net interest margin (NIM), the credit offtake and improvements in the credit quality of its corporate borrowers will offset the effect of peaking NIM. Besides the domestic factors, banking stocks will be driven by global influences for now.
Small and Mid-caps
Strong rally may be witnessed thanks to the pause in rate hikes. Small and mid-caps are extremely depended on interest rates as cash flows are considered riskier in this category. Stocks in consumption space and manufacturing will see a stronger rally. If we look at the BSE Smallcap 250 index, the PE was at 17.5x which is at par with COVID levels. Growth stocks and some tech stocks which fell over the last 18 months should see some light at the end of tunnel.
Debt ridden companies
Companies with an alarm of default and distress will witness a short-term relief rally too.
Companies would have come up with new capex, but where we are today, some companies are considering to postpone these plans thanks to recessionary fears. Change in the policy stance could bring some light to this much needed metric for the economy.
Finally on a macro level, the comments and forward-looking statement support the Indian rupee, FPI/FII equity flows, and puts downward pressure on 10-year bond yields.
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