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Going from Negative to Neutral 🔺

At the beginning of this month, the RBI paused rate hikes after six consecutive times of raising rates - giving the markets a reason to turn positive. Since the end of March, the markets have gained 3%, erasing half the losses seen in 2023 so far.


The important question is - are the markets pivoting or is it just one of those short-lived rallies?


It’s a pivot!

  • Inflation - CPI inflation fell to 5.7% in March 2023, compared to 6.4% in February 2023, and is now at its lowest in the last 15 months, and also within the RBI’s comfort zone

  • Growth - The RBI estimates India to clock growth of 6.5% in FY24, matching the projection made by the 2021-22 Economic Survey. India’s IIP grew by 5.6% in February 2023, a slight increase compared to 5.5% in January 2023, led by an improvement in the manufacturing sector

Just another short-lived rally

  • Inflation - Although inflation data showed some respite, it seems purely mathematical. March 2022 was the first month of the conflict between Russia and Ukraine, and a high base has resulted in numbers looking tepid on a YoY basis. With oil up 17% in the last month, and food inflation high and sticky, thanks to higher prices for cereal, milk and meat, inflation worries seem far from over

  • Growth - While the RBI has upped its growth estimate to 6.5% for 2024, the IMF and World Bank have cut them. In fact, the current run rate itself doesn’t seem too encouraging, with GDP growth of 4.4% in 3QFY23. There are multiple things that need to go right for growth to accelerate to RBI’s levels - crude needs to remain at US$ 85 a barrel, the monsoon needs to be normal, commodity prices need to continue cooling down, and credit growth needs to be in double digits

Where does Rupeeting stand?

  • There is an upward risk of inflation (China’s comeback, OPEC’s supply decisions, India’s problems around milk and meat shortages), and a downward risk to growth (full-effect of RBI’s 290 bps rate hike so far)

  • That said, India’s still poised to be the best-performing economy in 2023-24. Additionally, in 2023 so far, while the Indian markets have come off by about 2%, China is up 3%, the UK 6%, Japan 9% and the US 20%. India’s growth premium to emerging markets has reduced significantly

Changing stance: Negative to Neutral

  • After being negative on the markets for the whole of 2022, we are changing our stance from negative to neutral. Structural growth factors at better valuations compared to earlier are encouraging

  • However, there still are risks, which we think are not entirely reasonable at current valuations. There could be a downside led by higher inflation, more rate hikes, a pronounced slowdown/recession in the global economy, or even a sharp correction in global markets increasing India’s valuation premium again

  • Thus, while we’re turning accumulative, we aren’t yet calling out a sustainable change in direction

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