Indian stock market: Promising kick-off for Samvat 2080 – will the momentum persists?

The rapid and widespread shift in market sentiment is being driven by a global factor, resulting from a sharper than predicted decline in global inflation data. US October CPI fell to 3.2% from 3.7% in September. Rising inflation and its consequent impact on bond yields, along with hawkish monetary policy, pose significant challenges to the global stock market. The market reacted immediately to the data, experiencing relief that exceeded expectation. After that, bond yields fell below 4.5%, about 25bps on a WoW basis. This optimism is reflected in the WoW 2.1% gain on the US S&P500 index, at Thursday’s close.

There is a growing perspective that suggests the Fed’s hawkish stance may ease, possibly leading to more moderate rate cuts in 2024. This speculation has gained momentum as the economy appears to broke free from the restrictions imposed by the pandemic-induced low capacity, with supplies returning. to a more normal state. And the central banks are trying to reduce the money supply in the system to curb inflation. And well, the geopolitical risk is narrowing, and crude prices are declining.

What is worrying, however, is that the governments are still continuing their big fiscal program with a rising fiscal deficit. National elections are taking place in the United States and India next year, which is all the more reason to keep going. Household consumption is high, driven by a high amount of free money, and a low unemployment rate. Therefore, there is a risk that inflation will continue to be above the normal range for a sustained period, which would limit the bounce-rally.

US Bond Yield and IPT Trend and Forecast…

Source: Bloomberg

Economists forecast a prolonged period of inflation above the long-term average, with knock-on effects on bond yields, a factor that does not bode well for economic and market prospects. The central banks are in the drill to slow manufacturing to bring inflation under control. They will continue to maintain high rates to achieve that program unless a significant slowdown occurs, which is likely to decrease. For example, the probability of a US recession has dropped to 55% from 65% in January 2023, saying the economy is strong.

Therefore, a deliberate economic slowdown is expected, which would not favor the stock market in the medium term. First, business may slow and earnings may downgrade, and the Fed will keep rates high to keep inflation below the long-term average. Similar to US GDP growth for CY24, it is forecast to slow to 1% from 1.9% and 2.3% in CY22 & CY23, respectively. Although India is expected to maintain resilience due to a stable domestic economy and subdued external demand, but valuations may decline due to a reduction in financial liquidity.

The RBI, predicting risk in the excessive liquidity system, has measured to raise the risk weighting of unsecured loans from 100% to 125% and credit cards from 125% to 150%. This could lead to an expectation of a rise in NPAs and significantly in the case of categories such as Credit Card and Personal Loans, in the future. And to protect the equity of the banks and reduce the outflow of funds to high risk assets. This will have a moderate impact on the bank’s earnings growth, with an increase in lending rates especially to NBFCs, a drop in consumer demand and liquidity flow in the economy.

The author, Vinod Nair, is Head of Research at Geojit Financial Services.

Disclaimer: The above opinions and recommendations are the opinions and recommendations of individual analysts or brokerage firms, and not the views of Mint. We encourage investors to check with certified experts before making any investment decision.

Milestone Alert!Livemint tops the charts as the fastest growing news website in the world 🌏 Click here for more information.

Updated: 19 November 2023, 12:51 PM IST