Upadhyaya further says that the general interest rate cut cycle is usually positive for valuations and interest-rate-sensitive sectors. Having said that, much of this already seems to be discounted in the markets.
We have read about and heard Fed Chairman Mr Powell’s speech. Let us decode the rate-cut scenario from India’s perspective. Based on our fundamentals, we are ready for a rate cut but we want the apex central bank to start the process. What is your expectation in terms of rate – 25 or 50 bps? How will it impact the Indian RBI statement later?
Harsha Upadhyaya: In the case of the US, we are looking at a shallow interest rate cycle this time. While the debate is still on whether there is going to be a 25-basis point cut or a 50-bps cut, to begin with, it is obvious that the rate cycle is unlikely to be very deep and we may not see too many frequent cuts going ahead.
However, it may or may not have any impact on Indian markets as some of this is already discounted. Also, India may not necessarily just follow the US Fed. We believe that even in India, it is going to be a shallow rate cycle and probably we are unlikely to see any rate cuts over the next quarter or so. Whatever we see probably will be after December or in CY 2025.
So, to that extent, some of these things are already discounted in the market. As far as the general interest rate cycle and its impact on the markets are concerned, it is usually positive for valuations and interest-rate-sensitive sectors. Having said that, much of this already seems to be discounted in the markets.
Let’s talk about FPI investments and their overall strategy vis-a-cis rate cuts. Do you see them coming back the way we want? While the overall selling pressure from the FPIs have been countered by the DIIs and retail investors, we still cannot say that we are a market that can sustain without FPIs. What is your take on FPI flows around this rate cut timing?
Harsha Upadhyaya: Once again, I do not see any 1:1 correlation between interest rate movements in the global markets and the flows into emerging markets. It is too simplistic an assumption that most investors make at various points thinking that if there is an interest rate cut in the developed world, the money will flow into emerging markets, risky assets, etc, because many of the mandates may not allow you to shift from one asset class to another, one geography to another. So, I do not believe that this alone is going to determine our flows into India.
Having said that, we have seen very tepid flows into Indian markets for this calendar year. Generally, over 12-15 months, India has always received flows of over $15-20 billion in the past. This time around, that does not seem to be the case. The main reason for that probably could be the relative valuations, which have been quite expensive when Indian valuations are compared to the rest of the emerging markets at this point. It is very difficult to say whether just because of interest rate cuts, the flows will start to come back to India or not. However, what is very clear is that given Indian fundamentals and Indian corporate earnings growth, return on equity, which have all been superior compared to other emerging markets and since Indian weightage in the emerging market basket has consistently been going up and is second only to China, we can safely assume that over the next three-five years, we will see reasonably high FII participation. However, what happens just immediately after the rate cycle begins is very difficult to predict.How should an investor start playing out this particular trigger in their portfolio? Rate sensitive, capital-intensive sectors – what is going to be on your bet?
Harsha Upadhyaya: We are not basing all our portfolio decisions just on this particular factor. Multiple factors affect markets from time to time. In recent times, we have taken out some profit from some of the sectors where valuations have moved on the higher side and also at the margin, and we are likely to see some deceleration in terms of earnings growth.
For example, auto and auto components is one sector where we have booked some partial profits. Industrials, while we still believe that earnings growth is going to be superior, the valuations are slightly discomforting. So, to that extent, we have cut some positions even in industrials. Some of the money that we have raised by selling the exposure of these two sectors has moved into some of the defensive sectors such as IT and consumption. At these valuations, it is safer to have some defensive tilt to the portfolio. So, there’s not a very significant change to our sectoral allocation, but at the margin, we have moved away from some of the sectors where valuations have become quite rich and moved into consumption and IT recently.