After giving over 30% returns since mid-February, the Sensex, much like the broader equity market, has slipped into a consolidation phase which has been further accentuated by the cross-border tension between India and Pakistan. Many expect such disruption to be temporary, but “the event may well persuade the Urijit Patel headed Monetary Policy Committee (MPC) to pre-pone the interest rates reduction essentially to douse the panic among investors,” says Deepak Kapoor, analyst with ADC Legal. In fact, the ongoing correction in the market should be used as a buying opportunity as the benchmark index is poised to cross over 50,000 levels in the next five years. Pundits claim that the Sensex is expected to give about 13% compounded growth (every year) for the next five years, which taken together would be a significant jump of over 70% from its current level of about 28,000.
“People’s expectation of the market going up remains high, a reason why markets have not fallen drastically,”says Raghvendra Nath, MD with Ladderup Wealth Management Group. Reasons for this optimism lie in the strong possibility of interest rates going down as inflation looks benign amid a strong desire to revive the economy that looks in dire need of cheaper capital. Many see a good possibility of a rate cut, at least of quarter percentage points, on 4 October when the newly formed Monetary Policy Committee (having representation both from the RBI and the Government) meets for the first time to deliberate on interest rates that businesses feel are still too high. Even if the rate cut does not happen, says Kapoor, “the stand of the MPC is likely to be dovish.”
This coupled with the expectation of gradual rate hikes by the Federal Reserve might deter FIIs (dominant investors in Indian stocks) to fly out of the country. In fact, many large-pocketed pension and sovereign funds are intently sniffing at India’s potential to give them good returns on their investments here. Norway is one such enthusiast. Norway’s pension fund is worth $882 billion which The Economist says is more than double its GDP.
Moreover, if the government does succeed in implementing the GST, a path-breaking taxation reform, by April 2017, it will send a strong signal to the FIIs about the government’s ability to initiate reforms which the world community had long been urging. There is, however, a potential risk which might dilute India’s attractiveness, albeit for a very short period of time. Economists fear that if the capital flight out of India becomes overwhelming (due to Fed’s action) and rupee depreciates drastically, then the RBI might even get tempted to hike interest rates just to keep FIIs in good mood and keeping their money safe in India.