“There is a possibility of some earnings downgrades in select sectors due to rising raw material prices, demand compression due to rising interest rates, and weakness in some export-oriented sectors due to lingering fears of a US recession,” Harshad Patil, chief investment officer at Tata AIA Life Insurance, said in an interview to Moneycontrol.
Patil believes that the market seems to have already started factoring in this scenario, given the correction seen.
He feels foreign institutional investor (FII) flows can remain weak for some time as FIIs have a direct linkage to global sentiment, which currently looks a tad weak.
Do you expect India to fare better than a few developed economies which are expected to face recession?
Inflation is expected to remain sticky at elevated levels across most large global economies, including India. Overall, global growth rates would be sub-par this calendar year, extending to the next year. There could be a few countries whose economies could suffer a recession in the next few quarters. That said, we expect India to sustain its position as the fastest growing large economy this fiscal year.
Do you think the market seems to have already discounted some risk related to earnings downgrade?
There is a possibility of some earnings downgrades in select sectors due to rising raw material prices, demand compression due to rising interest rates, and weakness in some export-oriented sectors due to lingering fears of a US recession. However, we believe that the market seems to have already started factoring in this scenario, given the correction we have seen.
Is there any possibility of retail flow slowing down in coming quarters?
The Indian market has seen increased participation from domestic investors in the past few years. The dependence on FII flows has reduced to that extent; therefore, despite heavy FII selling, price correction in the equity market seems contained. Despite market volatility, we have continued to witness consistent flows in retail financial products. Investors seem to appreciate that equity is a long-term asset class, and these interim corrections should be an opportunity to invest for long-term wealth creation and to meet their long-term financial goals.
Given the significant fall in equity market and that India is expected to be the fastest growing large economy this fiscal, will FIIs make a comeback later this calendar year?
FIIs have been sellers in the Indian equity market for many months. We believe that FII flows have a direct linkage to the global sentiment, which currently looks a tad weak. Many central bankers across the globe are worried about inflationary pressures and hence have resorted to or are contemplating rate hikes to tame inflation. Under such a scenario, FII flows can remain weak for some time. But it is very difficult to put a definitive number to the FII flows as well as accurately identify a timeline for FII flows to turn positive.
Do you expect a pause in rate hike by Reserve Bank of India (RBI) after the repo rate reached pre-Covid levels?
The monetary policy committee (MPC) of the RBI expected inflation to remain above the upper tolerance level of six percent through the first three quarters of 2022-23. Moreover, the MPC opined that the persisting inflationary pressures could set second round effects on headline CPI (consumer price index) in motion.
The MPC is expected to nudge the repo rate higher in the bi-monthly monetary policy review in August so that it reaches the 5.15 percent level seen just before the pandemic. We expect further increases in the repo rate in the second half of FY23, the extent of which will be determined by the evolving trajectory of inflation in the medium term.
Is there any possibility of a bigger risk for the economy as well as the market from the current wave of Covid cases?
We have observed that over the last couple of years, the economic impact of the subsequent Covid wave has been lower in India compared to the previous wave as the Indian economy seems to adjust itself better over time to Covid-related disruptions. Moreover, with a significant part of the adult population in India already vaccinated, the possibility of widespread lockdowns is remote in any subsequent Covid wave. Hence, we believe the current wave of Covid cases would have a limited impact on any large disruption in economic activity.
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