High-beta stocks may outperform
This situation is attributable to high interest rates (repo currently at around 8%), which has increased the borrowing cost and deterred commercial investment and expenditure. The original reason for this rate regime was the sticky inflation; which in turn was triggered by the high cost of fuel imports.
But the scenario is changing rapidly. Increasingly, GDP growth has come to gain primacy for the policy makers. This is in the light of the fact that upside volatility in international prices of oil may now be limited, since the US is becoming increasingly self-reliant due to shale oil technology. This, along with the bottoming-out of the rupee suggests that the pressure of imported inflation may begin to dissipate in the coming months. Along with that, the rising political resolve to fix the economy is also a positive. Even by the parameters set by the RBI, the inflation outcomes have come to look more favourable. We believe that inflation growth may moderate even more as we approach the next financial year.
In this backdrop, it is becoming increasingly likely that the central banker may resort to a rate cut to boost up sagging capital formation. The debt market is already discounting a 25 bps rate cut in the next policy meet. We believe that, over the calendar year, we might see around 50-100 bps rate reversion in the upcoming cycle.
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