In conversation with Sundar Sethuraman, Bhat says policymakers should usher in changes gradually, so that markets get a fair idea of what to expect
U R Bhat, co-founder & director, Alphaniti Fintech
The Reserve Bank of India’s (RBI’s) surprise rate hike adds a new dimension of uncertainty to the markets, says U R BHAT, co-founder and director, Alphaniti Fintech. In conversation with Sundar Sethuraman, Bhat says policymakers should usher in changes gradually, so that markets get a fair idea of what to expect. Edited excerpts:
How will the central bank’s pivot to a tighter monetary regime impact equity markets in the long run?
Inflation and higher interest rates are not unmitigated catastrophes. They moderate purchasing power and therefore, demand. They also raise the cost of equity and consequently weigh on equity valuations. However, inflation also gives a leg-up to the nominal gross domestic product growth rate, which generates interest in the market.
Companies with good brands and led by innovation can increase demand for their products, even as they use inflation to increase their pricing power in the marketplace.
Inflation impacts each sector and company differently. The fact that inflation is high and interest rates will be hiked was known to the markets. Markets have been continuously pricing this information. As long as there are no negative surprises, markets are reasonably efficient in feeding new information to prices.
Has the market priced in the US Federal Reserve (Fed) hikes?
Markets have factored in higher interest rates that the Fed has announced. The Fed has gone about signalling the impending interest rate hikes quite methodically and has gone on record to say that there will be further hikes, possibly of a 50-basis point magnitude in the subsequent meeting and thereafter.
Markets are forward-looking. Reasonable expectations about the future are constantly priced in. Markets have a fair idea of what to expect, as long as there is an orderly rate change, based on macroeconomic data and a competent reading of the situation.
Of course, when the hike is announced, a few will be disappointed and some knee-jerk reaction is bound to happen. But the broader market adapts to the new reality quickly.
Were you surprised by the RBI’s out-of-turn hike? Is it bad for the equity market?
Whatever the central bank did was warranted and expected in the regular course. However, announcing rate hikes after an off-cycle secret meeting was not expected. Markets stabilised after falling steeply on the day of the announcement (May 4).
Investors will now have to keep looking over their shoulder for any such surprise announcement in future, adding a new dimension of market uncertainty.
Policymakers should, in general, usher in changes gradually based on reasonable interpretation of the economic data and emerging situation.
The market is still debating over the acute urgency to hike rates when we are in the middle of the most significant divestment ever witnessed. Such decisions have the potential to stymie the whole process.
The market consensus is that the RBI could have been more circumspect in the timing.
Supply-side disruptions have primarily fuelled price rise. How effective will the central bank intervention be in taming inflation?
Increasing the interest rates to address supply-chain issues may not be the most appropriate or effective method to deal with inflation. Instead of managing aggregate demand through interest rates, it is essential to address the underlying supply bottleneck. However, central banks cannot afford to remain quiet just because supply-chain issues fuel inflation. The RBI has done its bit.
Will foreign outflows from domestic markets continue?
The outflows could continue for some time because valuations continue to be somewhat stretched, interest rates are likely to be hiked further, and the dollar has strengthened.
During times of crisis, investors tend to gravitate towards developed markets. Global fund managers will start allocating more money to India once valuations moderate.
There are indications of inflation abating, a semblance of a solution to the crisis in Ukraine in sight, and Shanghai likely to gradually lift lockdowns ‘by end of May’.
Which sectors are you bullish/bearish on?
I am bullish on the financial sector. The bad loan issues over the years have been largely addressed, at least by well-run large banks, backed up by competent regulation.
Telecommunications is somewhat insulated from inflation woes and rate hikes, and the sector has become a cosy oligopoly.
Companies in the information technology sector are large exporters. While their valuations could be somewhat stretched, a huge opportunity in digitising businesses worldwide will ensure good investor interest.
Agri-related businesses can do well because of higher commodity prices and support prices.
Fast-moving consumer durables, consumer durables and staples, as also consumer-facing automotive stocks, may take a hit.
Pharmaceutical had a good run during the Covid-19 pandemic and may correct somewhat as normalcy returns.
Do you expect strong inflows from retail investors and domestic mutual funds to continue, given that returns this year may not be stellar?
The savings habit in India has changed for the good among the salaried class. Systematic investment plans (SIPs) have become immensely popular and inflows into SIPs will keep interest levels in equities high.
Moreover, retail investors who began investing during the pandemic are unlikely to leave the markets in a hurry.
The ease of investing offered by new-age financial technology companies has attracted scores of new investors into equities. While their high level of market participation is expected to continue, a sudden 15-20 per cent correction can force them to exit equities for good since these new-age investors have never experienced a painful bear market yet.