India's Costly Stocks On Edge After Record Run As Fed's Pivot Looms
September has also typically been a month of decline for the benchmarks, which having fallen six times in the last 10 years, according to Bloomberg data.
Indian equity market's record rally could see cautious trade this September as the US Federal Reserve's policy pivot might not result in expected flows given the price at which the domestic stocks are quoted.
Jerome Powell cemented that the world's largest economy will see rate cuts in September as inflation is on track to the 2% target. The "time has come" to adjust benchmark rates from their two-decade high, he said in the keynote address at the Jackson Hole Symposium last month.
While the chair made it crystal clear that interest-rate cuts are coming next month, traders were left guessing about the magnitude of the cut. His words during the once-a-year symposium sent global stocks higher and bond yields lower.
Money is set to churn out of US government securities as returns decline and flow into emerging and high-yield assets. India, among other emerging economies, is set to absorb higher flows as macro factors remain strong. Further, the gap between India and China has narrowed to a record in the MSCI Emerging Market index, which will further boost the outlook for domestic stocks.
Fed is expected to cut rates by 25 basis points in September and overall, cut rates by 75-100 basis points by December, according to Anindya Banerjee, SVP-currency, commodity and interest rates, Kotak Securities Ltd. Fed easing tends to increase flows to emerging markets and hence, India can benefit, he said. "India being one of the bright economic spots in emerging markets could benefit from the expected increase in inflows."
But, the current valuation of these stocks changes this narrative, according to market experts.
A lower-than-anticipated cut in interest rate by the US Federal Reserve in September will have markets on edge and put Jerome Powell's wording in focus to understand the dovish trajectory, according to Andrew Holland, chief executive officer of Avendus Capital Pvt.
"If the cut this time is 50 bps, the markets have a further leg to grow," he told NDTV Profit. "If it is 25 bps, then Powell's words will be noted on the trajectory for the rest of the year."
Any steep correction in equities globally would not replicate in India as the domestic market had become a low beta market with high cash levels, Holland said. "I don't think markets can go much higher in the short term."
September has also typically been a month of decline for the benchmarks, which having fallen six times in the last 10 years, according to Bloomberg data. The next Federal Open Market Committee meeting will be held on Sept. 17-18, 2024.
After two months of strong foreign inflows, global funds sold stocks for most of the session in August. Out of 21 sessions last month, foreign investors sold Rs 38,500 crore worth of stocks during 12 sessions.
So far during the year, while overseas funds have bought equities worth Rs 42,881 crore, according to National Securities Depository Ltd., updated till the previous day. Foreign investors have been skewed towards the debt side, having bought Rs 1,08,907 crore worth of sovereign paper.
The rate cut by team Jerome Powell could help mop up more inflows, potentially keeping India's stocks at high levels. The benchmark indices were back hitting fresh life-highs despite foreign outflows as domestic inflows kept stocks buoyant.
India's benchmark indices—the NSE Nifty 50 and the S&P BSE Sensex—have risen 16.3% and 14.3% respectively so far this year, making them the fifth and seventh best-performing Asian indices.
Valuations in the Indian equity market have risen to relatively high levels, leading FIIs to exercise caution when investing in India, according to Vaibhav Porwal, co-founder, of Dezerv.
Historically, rate-cut cycles in the US market have not been favourable for their equity markets, Porwal said. Foreign institutions will shift their focus to emerging markets, deploying capital where valuations are more appealing. "However, India may not be a significant beneficiary of these flows."
The mid-cap benchmark is valued over Nifty 50 and the small-cap stocks continue to gain more despite froth concerns. The price-to-earnings ratio of the Nifty is valued at 24.4, while that of the small-cap and the mid-cap index is at 33.6 and 45.8, respectively.
The inflows that the domestic stocks are likely to see will also help the domestic currency cool the near-high rate against the greenback, making the Reserve Bank of India's job easier. The Indian rupee hovers around the 83.90 level against the US Dollar after almost hitting the 84 mark.
The rupee can benefit if Fed lowers rates as expected, Banerjee said. "We could see USDINR test 83.25/40 levels on the spot."
India's central bank could lower rates closer to the end of this year as persistent food inflation keeps rate cuts at bay, according to Banerjee. "However, Fed rate cuts and comfortable core inflation may prompt RBI to ease rates in December."
