Wednesday, September 30, 2015

RBI signals the end of 'Bear Market' in India

RBI Governor Raghuram Rajan sprang up a pleasant surprise handing over a Diwali gift to the market/ investors, by lowering the benchmark Repo rate by 50 basis points to 6.75%, in the bi-monthly monetary policy announcement on 29th September. The benchmark rate is now at the lowest in 4 years. This has ushered an era of benign interest rate scenario in the country over the medium term. Although, our equity markets may swing widely based on international cues, this action will serve as the most important catalyst for laying the foundation of a long term bull market in India. 

Let us analyse the implications of the policy announcement:
  • The Governor has articulated his intention for working with the Govt. to ensure transmission of the rate cuts by the Banking system
  • RBI has lowered the forecast for GDP growth from 7.6% to 7.4% for FY 2015-16, focusing on an urgent need to boost investment/ growth
  • Inflation projection for January 2016 has been projected at 5.8%, against the previous estimates of 6%, based on benign commodity prices
  • To improve liquidity with the banks, RBI has proposed a reduction in SLR by 1%, in a phased manner.
The single most factor responsible for valuation of stocks in the market is the earnings estimates. Unfortunately, earnings growth has been muted due to two factors: Excess capacity/ low consumption and Cost escalation due to high Interest rates. The lower interest rate regime will help the high debt companies to save substantially on interest service cost. Consumption led growth will have to be given a boost by Govt. spending. The size able saving by the Govt. on Commodity/ Oil imports will help the Govt. to increase spending.

The timing of the rate cut is perfect, as it coincides the busy festival season, which is an opportunity for Corporate India to boost its sales (top line), the profits (bottom line) will improve with largess's doled out by RBI. Banks have started responding to the RBI gesture by lowering their base rates, SBI taking the lead by lowering its base rate by 40 bips to 9.3%.

I can safely say now that the bottom of our markets has been made at around 7500 on the Nifty, although, in the short term markets may swing widely between 7500-8200 on the Nifty, based on global cues and expectations of lower earnings for quarter ending September 2015. However, it is expected that the earnings growth will improve steadily from December 2015 onwards, and the same will reflect in the growth of the bench mark equity indices thereafter. Now is the time to invest in the equity markets for long term, provided investors are ready to brave the short term volatility over the next 3 months.