In an interview with ETMarkets, Dhanawat said: “A balanced approach optimistic for the long term but mindful of short-term risks is essential for navigating these peaks,” Edited excerpts:
The US Fed delivered a 50-bps rate cut in September and we saw a big move in Indian equity markets as benchmarks hit fresh record highs. How are you viewing this development for Indian markets?
The Federal Reserve’s 50-basis point rate cut in September marks its first reduction since 2020, with plans for two additional 25-basis point cuts in 2024.The Fed is gaining confidence that inflation is moving toward its 2% target and will carefully evaluate economic data to inform its future decisions. Projections indicate a cumulative 100 basis points cut in 2025 and 50 basis points in 2026.This dovish stance from the Fed is positive for emerging markets like India. With rates expected to decline over the next couple of years, we can anticipate a sustained inflow of foreign capital as investors seek opportunities in India’s robust economic growth.
The recent bullish movement in Indian equity markets, with benchmarks hitting fresh record highs, reflects this optimism. Overall, the Fed’s actions are likely to create a favourable environment for Indian markets in the near term.
What does the US Fed rate cut also mean that a slowdown is underway in the world’s largest economy. What is the kind of impact you see on India Inc. earnings, rupee and debt markets at large?
The recent 50 basis points interest rate cut by the Federal Reserve reflects its response to weakening economic indicators and growing recession concerns. Despite ongoing inflation in areas like shelter, healthcare, and auto insurance, core consumer price index (CPI) growth has remained below 2% for almost a year, signalling the Fed’s aim to stimulate the economy amid signs of a slowdown.
For India Inc., the implications could be considerable. A slowdown in the U.S. may lead to reduced demand for Indian exports, adversely impacting earnings for companies that depend on international markets. Furthermore, lower rates and a weaker dollar might result in decreased revenues for these exporters.
In the debt markets, the Fed’s decision could encourage investors to seek higher yields elsewhere, potentially making Indian bonds more attractive to foreign investors. Overall, the coming months will be crucial in assessing how these dynamics affect the Indian economy.
How do you see RBI taking its stand as the US Fed cuts rate?
While the Fed’s pivot is significant, the Reserve Bank of India is unlikely to follow suit in its upcoming meeting. The RBI is expected to maintain its current stance, illustrating how central banks can operate in an asynchronous manner, responding to their unique domestic macroeconomic conditions rather than simply mirroring the Fed’s actions.
The Indian market is trading at record highs – does it make you cautious or bullish at current levels?
While the Indian market’s record highs reflect strong investor confidence and growth potential, it also warrants caution about overvaluation.
A balanced approach optimistic for the long term but mindful of short-term risks is essential for navigating these peaks.
Do you see greed among retail investors or most of the money is coming via MFs so investors are putting money irrespective of market level?
The sentiment among retail investors is largely long-term bullish, with many contributing significant amounts through mutual funds. This indicates a commitment to regular investments regardless of market levels.
However, some retail investors are also driven by enthusiasm for quick gains, leading to riskier behaviours, such as taking derivative positions, which can result in substantial losses. Balancing long-term strategies with caution is essential to protect their hard-earned money.
How will FIIs flows shape up post the US Fed rate cut?
September 2024 marked the highest FII inflow into Indian equities since December 2023, following the U.S. Fed rate cut, which positively influenced FII flows. Lower interest rates are prompting investors to seek higher returns in emerging markets like India, boosting inflows.
Additionally, a weaker dollar enhances the appeal of Indian assets, making them more attractive for foreign investors. If global markets respond positively to the rate cut, overall sentiment may improve, further encouraging FII participation in Indian equities and bonds.
However, lingering concerns about the U.S. economy could lead some investors to favour safer assets, impacting the overall inflow dynamics.
Which sectors are on your radar, or which sectors are you overweight on?
Post Fed’s 50 basis points rate cut the sectors that are looking promising are financials, consumer discretionary and infrastructure. Healthcare offers stability and growth potential, making it a defensive play during uncertain economic times.
Do you see any early signs of exhaustion in the small & midcap space?
While valuations in the small and midcap space may seem stretched at this point, the long-term growth prospects appear promising. Many companies in this segment are poised to benefit from emerging trends and a recovering economy.
However, some signs of caution, such as rising volatility and profit-taking, suggest that investors should remain vigilant. A balanced approach that acknowledges both current valuation concerns and the potential for robust growth can help navigate in the small and midcap space.
Which theme is likely to do well – value or growth as the interest rate cycle is likely to peak out soon?
India presents a compelling growth story, driven by its robust consumption patterns and favourable demographic profile. Post Fed rate cut, the growth theme is likely to perform well, especially as the interest rate cycle appears to be nearing its peak.
Lower interest rates typically benefit growth-oriented companies that rely on borrowing for expansion and innovation. This environment can enhance their valuations as future cash flows are discounted less aggressively.
However, value stocks may also see renewed interest if investors look for stability and dividends in uncertain times. Ultimately, while growth may take the lead in the short term, a mix of both themes could provide a balanced approach as market conditions evolve.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
