“There is no question of a pause in rate hikes by Reserve Bank of India as global yields have repriced significantly upwards,” Sandeep Bagla of TRUST MF says in an interview to Moneycontrol.
Any lapses in rate hikes will be punished by a weaker currency, FPI outflows, and higher bond yields, Bagla believes.
With more than 25 years of experience in the financial markets, Bagla says it is quite possible that markets will go through a severe, sharp, and sustained sell-off.
Do you expect the RBI to take a pause after one big repo rate hike (of 50 bps) in the September policy meeting or will it take two small repo rate hikes in the September and December policy meetings before taking a pause from next year onwards?
There is no question of a pause as global yields have repriced significantly upwards. The competitive rate hike by central bankers will force India’s rates and yields to move up sharply.
Markets are expecting steep rate hikes by RBI in successive policies. Any lapses will be punished by a weaker currency, FPI outflows, and higher bond yields.
Do you think India’s ‘growth-inflation’ dynamics are likely to reduce the effect of quantitative tightening?
India’s growth inflation picture is not so rosy. Core inflation is high due to wage increases and growth numbers are dubious due to the base effect. It is irresponsible and misleading to say things like decoupling. In case of a global sell-off, India will participate wholeheartedly.
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Do you expect robust earnings growth in India going ahead, despite uncertain global environment?
No. One cannot talk about the slowdown and higher earnings in the same breath.
Do you think India will continue to enjoy high valuations premium compared to emerging markets and Asian peers in the coming years?
It is possible that valuations for India come down. We could take collective pride that they are at a premium to Asian peers. Not sure how that helps any investor.
What are the sectors that are really worth looking at now considering the global as well as Indian economic environment?
It is quite possible that markets go through a severe, sharp, and sustained sell-off. Probably defensives like FMCG could fall marginally lesser than other sectors.
Is the IT space looking attractive now or is it better to avoid and look at the banking & financial services space?
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The IT sector has shifted to temporary hires compared to permanent employees.
Are you worried due to the rupee depreciation against the US dollar? Also, will it have a major impact on the economy and earnings?
Given the rate and inflation differentials between India and the US, it has been traditionally expected that the rupee will depreciate against the US dollar by 3-5 percent every year. Every once in a while India has experienced portfolio outflows and currency depreciation, which leads to RBI hiking rates, and depleting the forex reserves to defend the fall in currency.
Finally, we end up procuring dollars at an astronomical cost to prevent further meltdown. So yes, sudden and sharp falls in the rupee are worrisome as it could lead to harsh regulatory actions. The post COVID global printing of money to support the real economy has led to price appreciation in various asset classes.
The impact of rupee depreciation would be 1) higher cost of imports which would increase inflation; 2) lower rate of exports as competitiveness goes down; 3) exaggerated FPI outflows to avoid currency and price losses; and 4) higher costs, lower exports, higher interest rates and elevated uncertainty would definitely impact economy and earnings adversely.
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