Good time to build up a portfolio of quality stocks

We are cautiously optimistic on the equity markets ahead and believe that it is a good time to build a portfolio of quality stocks with a medium term perspective. The equity markets have suffered over various issues— domestic and global—in the past two years. But the negative spiral of multiple issues on the domestic front— namely sticky inflation, high-borrowing rates, policy and administrative inaction/logjam, fiscal deficit concerns, weak INR and an overall subdued investor and corporate sentiments—are showing early signs of unwinding and therefore our view has become “cautiously optimistic”.

In the last few weeks, the government markedly sprang into action with a slew of measures. These measures have helped change investor sentiment and the equity markets have responded with a 8% rally since early September. About $4.5 bn of FII inflows have come in and the INR has appreciated after a long gap and there are signs of revival in the corporate sentiment too—important for the capex cycle to start improving. We discuss many of the macro issues important for the markets below.

A key issue is, when will RBI resume the rate-cut cycle?

While it’s difficult to predict the extent of rate cuts over the short term, rate cuts will resume soon and should go down meaningfully over the next two years unless oil prices and other global commodities play spoilsport again and inflation proves stickier. Due to adequate liquidity, the borrowing rates have

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