Are you seeing signs of capitulation in overseas markets led by the US or do you feel that this has some more downside because the way the consumer tech companies were being valued is completely being reset by the market now that liquidity will be lesser and rates will be higher and it may very well continue a bit more?
There’s pressure on rate sensitive areas of the equity market and risk assets in general and it is not just these tech stocks that are more exposed on the rate moves in the US but also on assets like crypto and other speculative investments. So I think this can continue for a while longer. Certainly the pressure on the US rate market is unlikely to lessen anytime soon.
There is still a debate about how much rate hike the Fed will carry out but a lot is in the price and in some sense, I would argue we are not too far from the end. But one does not really want to catch a falling knife in an environment where the market is still fairly bearish and expectations are still tightening and of course we do have the Fed FOMC meeting tomorrow. That will give us further indications.
What is the commentary the market would be pleased to listen to? Also, what is the commentary that could spook the sentiment further?
If the Fed allays the concerns, would they need to be hiking rates too aggressively in the months ahead? It would also suggest to us that the quantitative tightening, the reduction in the balance sheet for instance is not going to be that dramatic and then markets would get some reprieve but in reality, we would need to see inflation data showing some improvement.
It is going to be some time before US inflation or in fact global inflation pressures start to show any significant signs of lessening and until then, the markets will remain nervous because there will be concerns about how much – not just the Fed, but global central banks need to tighten policy to avoid inflation pressures becoming more entrenched.
Any thoughts on the way the Indian market is looking on the valuations front, the earnings quality and sensitivity to rates because here too rates will start going up in the second half of the year?
There will be some cases of rate sensitivity. The Indian market did very well for a large part of the last year. It did push up valuations in some sectors and to some extent, the foreign investors were withdrawing some of that inflow of capital that we saw last year. But that said, the RBI in our view is not going to hike prices as quickly.
I do not think we are going to see the same sort of pressure on India as it would have been in the past from Fed rate hikes. So, there may not be the same magnitude of pressure on India going forward. But again, there are a number of factors here; the oil import bill is rising with higher oil prices and that is likely to put some pressure on the rupee; but it is hard for Indian equities, especially tech stocks to ignore what is going on in the Nasdaq and US tech stocks. I think there will be some contagion and some correlation but maybe not as severe as the pressure that we have seen in the US tech sector in particular.
Would you be able to put a finger on areas of the Indian market which you like on growth opportunities front and on valuations front? Or do you not look at the Indian markets so closely?
Not in equities and so I would not be looking at sectors there. But more broadly, Indian equities have really had a very stellar year for much of last year. Clearly on an all market basis, valuations were looking stretched but India’s economy should still do pretty well this year on the growth front. We are still looking at a very solid year of growth and concerns may come from Omicron and whether that results in any pressure on the economy. But for now, it is hard to see too much of a roadblock unless the RBI has to be more aggressive in terms of monetary tightening but the market is already pricing in a lot.
How do you see the rate trajectory in the Indian markets from here on? Do you see a couple of hikes in the next 12 to 18 months here in India? Do you think RBI would be much more calibrated compared to its western peers?
I think there will be prospects of hikes. I would imagine there could be even more than two hikes in the next few months. We will first see some of the excess liquidity being drawn out of the market that we are seeing in the banking sector and the RBI. That will be one of the first indications of a move towards tightening.
Then the next step will be narrowing the repo and reverse repo rate differentials and that would mean a hike in the reverse repo rate. This will be followed at some point in Q2 by a hike in the actual repo rate. RBI will be more calibrated to some extent and it may not need to be as aggressive as the Fed for instance. But we do think that the path of higher rates will be set beginning with a repo hike in the second quarter and potentially one hike each for the next couple of quarters continuing in India.
A word on the quality of growth which you are observing here in India and the quality of macros compared to the last time there was a rate hike cycle in the West and how the emerging market was and how India was. Are you looking at the macros relatively better stacked now?
Yes, I think so. India has benefited from a better and healthier external position. Certainly capital flows have been more positive broadly with direct investment flows. Current account position has been widening more recently and will probably end up with some sort of a deficit. Compared to the past Fed tightening cycles, we are certainly not seeing that external position being as vulnerable as we have seen in the past.
That is why India may escape and not just India, several Asian countries will escape some of the brunt of the pressure and we do not expect to see a repeat of the impact of past tightening on India. India certainly will be able to isolate itself to some extent from Fed tightening. It would not be completely isolated and of course there will be some knock on impact but we would expect the external position to hold up and provide some protection to Indian markets.