WITH the US Fed maintaining a status quo on interest rates, the Street has now shifted its focus towards a likely rate cut by RBI later this month.
While the Street cheered the US central bank’s decision to keep the Fed funds rate unchanged near zero with the Indian benchmarks rallying nearly 1%, experts believe that a slew of important developments, including the data coming out of China as well as the financial health of India Inc, will continue to drive the equity market going ahead.
According to Hitesh Agrawal, head, research, Reliance Securities, investors’ focus will now shift back to global economic growth challenges in general. “For Indian equities, all eyes will now be on the RBI monetary policy on September 29,” said Agrawal.
After Friday’s recovery that helped benchmark indices close the week more than 2% higher, market participants expect more consolidation. “Our markets might find some amount of stability with a hope that RBI might consider a cut in the repo rate during the upcoming meeting,” said Rajesh Cheruvu, CIO, Royal Bank of Scotland.
On Friday the 30-share Sensex closed at 26,218.91, clocking in weekly gains of 608.7 points while the broader Nifty added 192 points to close at 7,981.90. With this rebound, the markets are now trading close to their long-term valuations of 15 times one-year forward earnings. Bank of America Merrill Lynch expects a rate cut as the four pre-conditions — greater transmission of lending rate cuts to consumers by banks, low inflation,monsoon out-turn and status quo in the US Federal interest rates — seem to have been met.
However, it also said that with a possible Fed rate hike now postponed to December 2015, capital flows could stall till till December.
Markets experts also point out that concerns about China would have a higher bearing on the Indian markets in the near-term, even more than a interest rate hike by the US Fed.
Saurabh Mukherjea, CEO of Institutional Equities, Ambit Capital, pointed out that events like further devaluation of yuan would pose bigger threat to domestic markets.
He points out that the rise of EM equity as an asset class around 12-13 years ago was on the back of a rising China. Most emerging markets have witnessed good inflows from foreign investors over the last 10-12 years.
‘It follows, therefore, that concerns about China can impact the perception of investors about the very concept of EM equity as an asset class. Most emerging markets have started to witness outflow of foreign funds already. This trend is expected to continue in the days to come and India is unlikely to ride this out without getting affected,” added Mukherjea .
After a prolonged selling streak, the Indian stock markets found some relief on Friday in terms of Foreign Portfolio Investors(FPIs). The FPIs who sold more than $3 billion worth equities since August bought shares worth $98 million, provisional data in the stock exchanges showed. This is the best buying by FPIs in nearly one month.