DAILY VOICE | Don#39;t expect interest rate tightening in FY22: Piyush Garg of ICICI Securities

Market Outlook

Piyush Garg, Chief Investment Officer at ICICI Securities expects consolidation in the market going forward with more stock-specific action. Any large correction in equity market will be led by fall in global markets, he feels.

Piyush Garg has over 23 years of experience in the Indian financial markets.

The central bank is expected to continue with its current accommodative stance for the eighth straight meeting to maintain sufficient liquidity in the system. “We anticipate small reverse repo rate hike by RBI to address the liquidity issue,”┬áhe said in an interview to Moneycontrol’s Sunil Shankar Matkar.

Edited excerpts:

Q. RBI monetary policy meeting will be held this week. What are your broad expectations from the RBI and also do you expect any sectoral measures?

The central bank is expected to continue with its current accommodative stance for the eighth straight meeting to maintain sufficient liquidity in the system. Last year on May 22, the interest rates were cut-off to historic lows. In fact, we don’t expect the interest rate tightening in FY22 because the economic revival is yet to reach the pre-pandemic levels and growth will remain key preference going forward.

However, the inflation worries may remain despite the recent cool-off in inflation to 5.3 percent. The recent Evergrande issue in China could derail the sharp metal surge for sometime keeping inflation in check. The current liquidity in the system has reached Rs 9 lakh crore. We anticipate small reverse repo rate hike by RBI to address the liquidity issue.

Government’s focus is to revive manufacturing activity and job creation through production-linked incentive (PLI) schemes. This is where more industries can be brought in going forward like we recently saw PLI of Rs 10,683 crore in textiles especially for man-made fibres and Rs 26,058 crore for automobile sector.

Q: After stellar run in September, do you think the same kind of performance will continue in October month as well and what could be triggers to watch?

Nifty has almost met our target for this calendar year. We believe consolidation is expected going forward with more stock specific action. The forthcoming quarterly results and demand surge in festival season will provide the next trigger till the budget announcement in February 2022. The pent up demand is seen in Consumer goods and Building materials. Rural segment has recovered from the Covid-2 impact and it would be major driver going ahead.

Agriculture sector clocked a growth of 4.5 percent YoY versus 3.5 percent YoY, on account of robust food grains production in the rabi season. Despite the inconsistent monsoon, the sowing of kharif crops has almost reached at par with the previous year.

Going forward the major theme will remain Capex which is announced by many corporates so far. In addition, many IPOs are going to hit the markets in the coming months which will take away some liquidity from the secondary markets. Overall, the secondary markets may see consolidation going forward. Any large correction in equity markets will be led by fall in global markets.

Q: Do you still think third Covid wave as a big risk for Indian equities? What are other risk factors (global as well as domestic) that can puncture the current momentum?

The trend seen in developed countries is quite encouraging. Despite surge in Covid cases the severity of the disease has come down significantly in US, UK, Germany, etc. In India vaccinations have come close to 90 crore, thus providing further opening up of the economy.

However, markets are still carrying the inflation risk (which is majorly emanating from rising commodities, crude oil and housing markets) would eventually lead to interest rates increase globally. The current energy crisis of sorts as seen in Europe is pushing the energy prices higher which may be sentiment negative for our markets. However, if the pace of the same remains slow, it would have limited impact on the markets.

Historically it is seen that any sharp surge in US bond yields generally have negative impact on the emerging markets in the short term. So far Indian markets have remained resilient amid the Chinese government crackdowns on their own sectors. China’s growth is expected to remain slow in the coming quarter. The recent Power crisis has led to shut downs in many Chinese industries and their property market tends to be in declining trajectory amid Evergrande issue. India could be the beneficiary of MSCI inflows as the previous fear of higher China weight in MSCI may not happen, infact the reverse may be seen.

Q: Is it the time to be more cautious or time to go overboard while investing in current rally?

In last 3-4 years, Nifty has seen inclusions from capital efficient sectors like Consumption, Insurance, etc which have elevated the Nifty P/E (price-to-earnings) and thus it is not fair to say that Nifty P/E is too high than last 10-year average.

Major impact on Nifty P/E is seen from 2016 to 2021 (approximately increase of about 7-8 points in P/E). Otherwise Nifty P/E was near 20 in 2006, 2011 and 2016. From 2016-2021, the major weight increase is seen in three Nifty sectors: BFSI (+8.33 percent), Consumer (+1.18 percent) and Oil & Gas (+2.4 percent).

Current Nifty P/E is trading at 28.68 percent premium to 10-year average while it is only 5.2 percent premium to 5-year average. Thus Nifty valuations don’t seem to be too stretched considering the changing constituents of the index which have higher P/E. This trend is likely to pick up further with likely inclusions of Avenue Supermarts, Info Edge, Godrej Consumer Products and Dabur in the coming months.

Hence one must follow discipline or a sound asset allocation approach while investing in the markets and not get perturbed with sharp rise and fall in the market.

Q: Brent crude futures crossed $ 80 a barrel mark, up from $ 52 a barrel in current year 2021. Should one be more worried now with respect its equity market positions?

Higher Crude prices surely can dampen the sentiments as it would be major contributor to inflation surge. Every $ 10 increase in Crude prices increases the current account deficit by nearly 0.5 percent which can lead to currency depreciation and can have impact on inflation as well, triggering the FII outflows. Though the dynamics of energy seem to be shifting towards renewable and electric vehicles which can bring down the demand for fossil fuels. However, in the short-term the pent up demand and supply constraints are still pulling the crude prices higher.

Q: After several measures taken by the government to support banking sector, should one take a bullish view on banking as well as financial services? Is it the time to go overboard on PSU banking space or stick to private banks only?

India has not seen any major capex from the private sector in the last 7-8 years. The capex cycle is likely to be revived in the coming quarters which will enhance the credit growth of the banks. The lower slippage rates and better collection efficiencies have kept the things in control. The PSU banks have been losing market share to private peers which is where for long-term investments we are left with few choices like SBI in the PSU space. The corporate NPA cycle seems majorly behind as the asset heavy balance sheet sectors of the economy have started to do well. Provisioning coverage ratio of corporate loan book is near 85%. Thus corporate linked banks can revive faster going ahead.

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