By Srikanth Subramanian
The US Federal Reserve didn’t bat an eyelid when it raised interest rates by 75 basis points on Wednesday. It was the third consecutive time the Fed has raised rates, the highest level since before the 2008 financial crisis, up from near zero at the start of this year. It is relentless in its drive to fight inflation. Chairman Jerome Powell said, “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” He added that further hikes are coming and rates will stay elevated until 2024.
It is inevitable the monetary policies in emerging markets will take cues from the US Fed. The RBI’s Monetary Policy Committee will take guidance from high inflation in India and uneven data points from global economies. You also have to take into account that banking system liquidity in India has gone negative compared to 2019. India’s retail inflation for August came in at 7%, above RBI’s comfort range. The expectation is that the RBI will increase rates by 25 basis points. However, it is very possible that the RBI might decide this is a good time to be ahead of the curve and increase rates by 50 basis points.
In the last month, Indian markets (BSE Sensex) have managed to stay above 59,000. But there is a possibility that this might not be possible for too long. The Fed has raised interest rates and the difference between the US and Indian interest rates will grow thinner.
The rupee will continue to get weaker. On September 22, it closed at Rs. 80.86 to the dollar. For the average Indian, loans will become more expensive. To put it simply, Indian stock markets will be volatile.
There is a likelihood that FIIs (foreign institutional investors) will not be as bullish on India. In August, they were net equity purchasers to the tune of Rs. 22,025 crores. As of September 21, the corresponding number was just Rs. 2,963 crores.
One major boost for Indian equities is the government’s focus on capex, especially the PLI (production-linked incentive) scheme which should also go a long way in boosting capex spending. For FY23, the Indian government has a budget for a strong Capex growth of 25% to Rs 7.5 lakh crore. The latest data shows that the government has already achieved 27.8% of the capital expenditure target in the first four months of the current fiscal year. The Centre’s Capex rose 62.5% year-on-year in the April-July period (current fiscal year), with roads and highways, railways and defence being the top three investment areas.
This capex growth should act as a multiplier effect for India. Higher interest rates abroad might cause India’s exports to slow down but this will also cool down commodity prices. This in turn will help cool down India’s imported inflation which makes up a large part of India’s dollar bills.
Retail investors, acting on their own, will find it tough to pick the right stocks in these tumultuous times. There are just too many variables in the equation, and even one change could have a significant impact. The Nifty50 has traded at a 16 PE ratio for 15 years and is now trading at 21 times. There is irrational exuberance in a few sectors. The volatility should help temper them.
While loans will become more expensive, fixed-income assets will also offer more bang for the retail investor’s deposit. While this will cause demand to slow down, this is also an opportunity for investors to stock up on good-quality fixed-income assets like bonds and fixed deposits. Low liquidity along with high credit offtake is leading to a sharp uptick in the short-term yields. For the short term, it might be a good time to switch asset classes.
(Srikanth Subramanian is the CEO of Kotak Cherry. The views and opinions expressed in the column are personal and do not necessarily reflect the opinion of the organisation or Kotak Group, or FinancialExpress.com.)