If the slowdown in inflation continues, it will eventually lead the Fed to reduce its aggression: Sneha Poddar

Bombay: Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services, said if the slowdown in inflation continues, it will eventually lead the US Federal Reserve to reduce its aggression. The Reserve Bank of India (RBI) is more likely to follow the US Fed and therefore will not lower its tone until adopted by the latter.

Here are excerpts from the interview:

Q. Do you think that after US CPI inflation printed below estimates, the Fed will slow rate hikes and the RBI will follow suit?

A: US CPI inflation data for July came in at 8.5%, down from 9.1% in June and slightly below expectations of 8.7%. However, Fed officials reacted to the softening inflation data saying it did not change their stance on higher interest rates as inflation still remains above unacceptable levels. Given that this is only the first sign of an inflation spike and it is too early to rule out further data on high inflation, there will be uncertainty over when the US Fed will ease. its aggressive rate hikes. If the inflation slowdown continues, this will eventually lead the Fed to reduce its aggressiveness. The RBI is more likely to follow the US Fed and therefore will not lower its tone until it is embraced by the US Fed.

Q. The repo rate of 5.40% is already higher than the pre-pandemic level, but the RBI still maintains the “retreat from hosting” stance. Do you think the neutral level of the repo rate is equal to or greater than 6%?

A: The RBI has cumulatively increased the repo rate by 140 basis points to 5.4% in FY23 to date. He reiterated his continued focus on “withdrawing accommodation” to contain inflation while supporting growth. However, he kept his inflation/growth forecast unchanged at 6.7%/7.2% YoY, respectively, for FY23. to contain inflation without harming growth? Also, the MPC didn’t seem accommodating at all. There was no change of stance or relief in the RBI Governor’s statement denying a possible pause in rate hikes. Thus, we believe that the terminal rate in this up cycle could be between 5.75 and 6.0%

Q. Under current market conditions, which sectors are likely to perform well in terms of returns for investors?

A: We think the BFSI can do well in a rising interest rate scenario. On the other hand, with a good monsoon, the upcoming festive season and falling commodity prices, urban and rural demand is expected to pick up and pick up and so we are positive on consumption, autos and retail. by retail. With the opening of the economy and the observed structural change in favor of the industry post Covid, QSR remains in an ideal position. While the uncertainty surrounding the amount of interest rate hikes is likely to impact the performance of real estate stocks in the short term, the longer-term thesis on the revival of the real estate cycle remains intact. There is a looming opportunity in the domestic hospitality industry and the expected bullish cycle bodes well for the sector. We are selectively looking at the IT sector as valuations have become attractive for accumulation from a long-term perspective.

Q. Where do you see levels on benchmarks going forward given FI inflows into domestic equities?

A: Strong market momentum helped Nifty gain over 2,500 points from June lows, and thus erased all of the calendar year decline to date and turned positive. Strong macro data, with the FII turning positive, stable earnings and healthy monsoon progress were some of the main factors supporting the market. FIIs (including the primary market) turned positive for July after nine months of continuous outflows and have been continuous buyers throughout August so far. With commodity prices easing, even inflation appears to be peaking and the festive season is about to begin, which should support demand and hence corporate earnings. Thus, the overall market trend seems to be positive, but bouts of volatility cannot be ruled out as uncertainty over the quantum of the rate hike and the struggle between China and Taiwan continues. Additionally, with this recent rally, Nifty is now trading at ~20x FY23E, above its 10-year average, offering limited short-term upside. Going forward, it could be a tug of war between domestic and global factors that could determine the direction of the market.

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