The market always knew inflation was a problem, they knew the RBI was going to move at some point, I’m surprised they didn’t factor that in!
If you look at the market and break it down into two parts – the first is that the underlying cash market bond yields are trading above 7% anyway. Second, if you look at the OIS market with a thought on the one-year or five-year OIS interest rate futures, they discounted a rate hike of almost 135 to 140 basis points and also thought to bond yields because we have to take a year ahead across the board for a year.
Once again, the bond market believed that a series of rate hikes would occur. Therefore, having not raised the interest rate in the last policy, RBI introduced a hike in the repo rate of 40 basis points, higher than the reverse repo rate from the point of view of buying back bonds on the market. But having now delayed the hike and realizing that inflation was a concern for growth as well as the global economy, they accelerated the rate hike which otherwise would have been delayed for another policy date or two. .
It used to be that people said RBI was behind the curve and something was correcting it. But the view of the bond market is actually that even though bond yields rose 20 basis points today, otherwise the market has built up significant expectation and that’s how bond yields reflected the potential upside rates that RBI would have ultimately made. Now that they have done so in a sudden fashion, although the market has reacted today, it must at least see that RBI has held on to the accommodative cycle.
Maneesh Dangi says that if inflation does not come down, growth will go down; estimates will drop; Multiple PE will go down. If everything crashes, what should equity investors do and why do you think the markets won’t crash?
The current situation certainly leads to some uncertainty in the market. There is absolutely no doubt about that and the impact of that on the company’s earnings is also going to be reflected over the next one or two quarters. But after seeing that, I think if you look at the problem in the world, I definitely think that India is relatively better positioned compared to other economies in the world.
India is trying to curb growth as the strength of the economy comes from the rural economy. The government has been the biggest spender unlike the private sector and private sector investment spending is also gradually coming back. Since prices are high and profit margins are generally good, the investment cycle will therefore also begin.
Maneesh also mentioned that it should be seen as a short cycle and hence from an investors’ perspective one should look beyond the current cycle. If the Reserve Bank of India has raised the rate, it is essentially acknowledging the fact that instead of keeping rates low for too long, it has suddenly decided to hike rates significantly and cause panic in the market.
Having kicked off the ball for expectations for the future, at least the market will be properly priced and future volatility could also be reduced given that we broadly know the trend that RBI will take and, accordingly, how companies will adjust their balance sheets .
Also, unlike in the past, the credit market is much more mature today and people who have borrowed in the market, and even more so corporate balance sheets, have been significantly deleveraged. Therefore, the ability to borrow and grow the business by generating high ROE will also be quite important as we move forward. This is a significant improvement that has occurred in the equity market that we have never witnessed in the past.