NEW DELHI: As the Budget dust settles, Dalal Street is facing a real challenge. All these years, the market shrugged off high valuation concerns, citing ample liquidity globally. But with inflation going out of control, central banks globally are in action and Dalal Street is facing the heat.
The Bank of England took the lead, raising interest rates by 25 basis points to 0.5 per cent last week. Traders now largely see a 50 basis points Fed rate hike in March. While the RBI is unlikely to bite the bullet in its Thursday’s policy outcome, India’s retail inflation hit a five-month high of 5.59 per cent in December and is unlikely to come down anytime soon with oil prices hitting a high of $95 a barrel recently. The RBI may soon be acting, today or tomorrow.
Last three days of fall have shaved Rs 6.7 lakh crore worth of wealth off investor pockets on Dalal Street. The market value of all BSE listed stocks fell to Rs 263.76 lakh crore today against Rs 270 crore on February 2.
India’s consumer price inflation is forecast to rise more than 6 per cent this quarter as core prices pick up. “This will test the RBI’s commitment to continue with an accommodative monetary stance, particularly as many other leading central banks consider bringing forward the timing of interest rate tightening,” Moody’s said last week.
It said the RBI will keep its benchmark repo rate unchanged at 4 per cent, but said even as the Omicron threat to India’s recovery is starting to wane, supply-side stress and volatile energy prices are stoking inflation concerns.
Bond yields too are rising.
Edelweiss said with yields spiking, RBI’s challenge mounts. On one hand, it might be uncomfortable with a spike in yields, but on the other, it is trying to normalise excess liquidity.
“Navigating this dilemma becomes even more challenging with the Fed/ECB on a tightening path. Thus, RBI’s commentary around these issues will be keenly watched,” it said.
Rising inflation could eat into corporate earnings as was visible in a few December quarter results. India is perceived to have high valuations, with Nifty50 trading at one-year forward earnings of 20.5 times.
The role of quarterly earnings here is important as India is seen clocking perhaps the best earnings growth in Asia this year, with only Indonesia and the Philippines higher in terms of consensus forecasts, Jefferies noted.
The consensus earnings growth forecast for the MSCI India this year is 20.3 per cent, compared with 11.3 per cent for Asia ex-Japan region.
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