Nifty rally breaks away from 18-month long bear market; RBI may cut rates later this year

Is the current trend reversible sustainable? What’s changing the market movement? As the fundamentals of the economy change, it could be possible that this rally is here to stay.

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Experts believe that inflation has peaked and now will remain within the RBI's tolerance band.

By Sushant Bhansali

Nifty has witnessed a strong rebound in the last couple of months, from a bottom of ~17,000 to a peak of ~18,400. This rally must have come as a massive relief for investors who had been reeling under a bear market for a good 17-18 months. The key questions to ask at this juncture are: a) why this sudden change in market movement, and b) is this trend reversal sustainable.

To answer the first question will lead us to answer of the second quite automatically. The thing is that the fundamentals of the Indian economy have improved significantly in the last couple of months and a lot of concerns that were loom large have since been alleviated. It is this which has led to the turn of events and is primarily responsible for us believing that the rally is here to stay for good.   

Entering FY24 on optimistic note

As mentioned earlier, we enter FY24 on a fairly optimistic note. The credit growth in the economy continues to sustain in double digits (despite the high base) led by strong growth in retail credit even as private sector capex has started picking up led by the MSME sector. This is the first sign that the fundamentals of the economy remain on strong footing.

Inflation has peaked out and is now expected to remain well below the upper end of the RBI tolerance band which effectively means that the tightening cycle is well and truly behind us. We believe that post a longish pause, the last quarter of CY23 should witness the start of the rate cut cycle. This should help the equity markets settle down. 

Lastly, rural growth has stabilized and has started to show signs of a revival. Recent softening in inflation trajectory, the good winter crop and expectations of near-normal monsoon are some of the key factors which will lead to a revival in rural demand. This will enable some of the sectors like FMCG & Auto to witness a stronger growth trajectory.

The earnings growth outlook continues to remain fairly stable and NSE Nifty 50 should easily deliver mid-teens EPS growth. Unlike FY23, the earnings growth should be fairly broad-based. This along with valuations, makes the risk-reward quite compelling at this juncture.  

We believe that India is well and truly on course for being in the elite club of economies that have attained US$5trillion in size. Investors would do well to maintain a long-term growth outlook and continue investing in the current volatility from a 3-5 years time frame in mind to create exponential wealth.

(Sushant Bhansali, CEO, Ambit Asset Management. Views expressed are author’s own. Please consult your financial advisor before investing.)

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First published on: 20-05-2023 at 08:49 IST