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Informist, Wednesday, Oct. 9, 2024

 

By Anshul Choudhary

 

MUMBAI – The Reserve Bank of India easing its stance to 'neutral' lifted key equity indices 1% on Wednesday, but continuing concerns about crude oil prices and the recent large outflows by foreign investors ensured the equity market ended lower, erasing all the gains of the day. Crude oil prices are up nearly 7% this month after Iran's missile attack on Israel, and analysts say concerns over crude oil prices will continue to hang over investor sentiment.

 

The Nifty 50 had risen over 200 points after the RBI's statement, but the index erased all gains to end 31 points lower at 24981.95 points. Shares of most banks and other financial services companies mirrored the movement of the benchmark index – rising after the RBI statement and then giving up all or most of the gains. Stocks in other rate-sensitive sectors such as real estate and automobiles, however, managed to hold on to some of the gains chalked up in early trade.

 

The RBI changing its policy stance to 'neutral' was perceived as a positive for the equity market and gave analysts some confidence that inflation is heading towards the central bank's target of 4%. Analysts said the policy cemented their view that India might see rate cuts in the coming months, with some expecting rate cuts as early as in December. The RBI will detail its next monetary policy statement on Dec. 6.

 

While the change in stance was positive, the muted reaction suggests investors are concerned about global risks, analysts said. There is a risk that Israel may retaliate against Iran, which may impact oil production from the region and lead to an increase in crude oil prices. "I expect heightened volatility because of uncertainty...if the geopolitical situation worsens, inflation could rise again in India," Sanjeev Hota, head of research at Sharekhan, said.

 

In its statement, the RBI also highlighted this as a risk to inflation. "Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation," Governor Shaktikanta Das said while announcing the monetary policy.

 

The other big risk is from China, where stimulus measures announced by the government, and hopes of more to come, led to outflows from emerging markets, including India, last week. Foreign investors net sold over INR 400 billion of Indian equities last week, preferring to buy stocks in China, where valuations are comparatively cheaper. This took the Nifty 50 down 4.4%.

 

Analysts said if China announces more measures to boost economic growth, India would continue to see outflows owing to its expensive valuations. China's finance ministry will hold a press conference on Saturday and media reports say it is expected to announce more measures to boost the economy. Looking at the risk from China, Nomura Global Research on Tuesday said in a note that Indian equities might underperform in the near term compared to the broader Asia index, which excludes Japan.

 

"There is a risk if Israel attacks Iran, China announces more stimulus, and US inflation rises," Shrikant Chouhan, head of equity research at Kotak Securities, said. "Upside is capped in the near to medium term, and it will be extremely difficult for markets (Nifty 50) to cross its earlier lifetime high." The Nifty 50 had hit a lifetime high of 26277.35 points on Sep. 27, but the recent correction has pulled the index down over 5% from its high.

 

While large-caps may manage to absorb this risk owing to strong domestic flows, mid-caps and small-caps are at a greater risk of correction due to high stock valuations, analysts said. Emkay Global Financial Services pointed out that high valuations in the broader market meant the rate easing cycle was already priced in and might not trigger any major rise. This is despite the broader market indices falling 2% or so this month. "This fall is very, very mild and the correction could be deep as valuations are extremely high in some areas," Hota of Sharekhan said. 

 

Analysts said that for Indian equities, most risks stem from global uncertainty, while domestic factors are largely favourable. They acknowledged that while earnings growth has slowed down, considering the recent slump in corporate earnings growth and automobile sales, they were confident that the festival season and higher spending by the government would bring back demand and boost earnings in the second half of the current financial year.

 

"The consensus Nifty FY25 EPS has been steady at INR 1,134, (15.9% YoY growth) despite the weak headline 1H (Apr-Sep)," Emkay Global Financial Services said in a note on Wednesday. Despite risks from West Asia and diversion of flows to China, the brokerage expects strong earnings growth to keep Indian markets favourable for long-term investors.  End

 

Edited by Avishek Dutta

 

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