After a gap of nearly 3–3.5 years since the last rate hike in February 2023, the RBI has raised repo rates again. The key question is whether this will be a one-time hike or the beginning of another rate-hike cycle. Current indicators suggest that we may witness further rate hikes going forward as RBI has changed its stance to a calibrated tightening of the rates. Focus now of RBI seems to be to contain inflation.
With US interest rates remaining elevated and India's CPI inflation outlook at around 5.2%, several factors are putting pressure on the Indian economy, largely driven by global developments.
First, high US interest rates continue to pose a challenge to India. US treasury yield is at around 5.23%. Additionally, significant capex by technology companies to fund AI-related investments is drawing capital into the US.
Second, the ongoing West Asia conflict and the Russia–Ukraine war could lead to further supply disruptions, adding to inflationary pressures. Not only are the oil prices at elevated levels but refining capacity is also adversely affected and shipping cost are also very high, adding pressure to the overall impact.
Thirdly, on the domestic front, an unfavorable monsoon and the potential impact of El Niño could affect agricultural production, push up food prices and weaken consumption.
Fourthly, the continued pressure from the US dollar, more aggravated by the consistent FII outflows, is keeping the equity markets subdued. As a result, a meaningful revival in FII flows into India may not happen anytime soon.
Overall, these developments do not present a particularly favorable environment for Indian equity markets. However, one silver lining is that there is a reasonably strong growth in the economy and the GDP is also expected to grow at 7.8%
What should investors do?
In the current environment, investors should focus more on multi-asset allocation strategies rather than taking aggressive equity exposure.
For investors looking to invest in equities, the preference should be towards large-cap funds (preference through Flexi cap), with a staggered investment approach rather than deploying the entire amount at once.
On the debt side, rising interest rates are likely to improve yields on liquid funds, making them relatively more attractive. Investors can look at Hybrid SIFs, but please look at the strategies of each fund as you cannot compare them at all even though they are in the same category.
Happy Investing!
(For educational purposes only. This is not investment advice.)
