Markets in a Nutshell
The Indian equity markets continued their bullish trend, with both the Nifty 50 and Bank Nifty closing at all-time highs.
We gave ourselves a little pat on the back since it panned out exactly how we had envisaged in last week’s note - “We expect the bullishness to sustain, and for the Nifty to possibly move towards 25,550-25,850. Bank Nifty, which has been underperforming so far is expected to outperform and make a move towards all time high levels soon.”.
This week, Nifty 50 touched an intraday high of 25,849 and closed at 25,790, resulting in a weekly gain of 1.7%. The Bank Nifty outperformed, gaining 3.7% to close at 53,793. Broader market indices lagged slightly, closing the week with marginal gains.
Index | September 13, 2024 | September 20, 2024 | % Change |
Nifty | 25,356 | 25,790 | 1.72 |
Bank Nifty | 51,897 | 53,793 | 3.65 |
Midcap Nifty | 60,016 | 60,208 | 0.32 |
Weekly Top Gainers (Nifty 500) | Weekly Gain (%) |
BSE | 37.28 |
Concord Biotech | 25.09 |
Max Healthcare | 17.62 |
KPR Mills | 14.11 |
Asahi India Glass | 13.54 |
Weekly Top Losers (Nifty 500) | Weekly Loss (%) |
PNB Housing Finance | -11.29 |
Glenmark Lifesciences | -10.91 |
KNR Construction | -10.45 |
BLS International Ser | -10.41 |
Apar Industries | -9.44 |
Big Cut = Big Push?
In a much-anticipated move, the US Fed announced its first rate cut since 2020. While market expectations were for a 25 bps cut, the Fed surprised by reducing interest rates by 50 bps. This marks the beginning of a new era of monetary accommodation, with Fed projections hinting at further rate cuts.
While the cut was deep, and the Fed guided for rates to fall by a further 200 bps over the next two years. Despite this, the Fed Chairman affirmed that demand is strong - downplaying concerns of a hard landing.
Notably, this is only the third time in history that the Fed has initiated a rate-cutting cycle with a 50 bps reduction, previously seen in 2001 and 2007. The difference this time though is that the US economy is still performing well.
What Happens Next?
Now that the much-anticipated cuts have taken place - what next? There are two things that are widely spoken about:
Flows into emerging markets like India increase.
The broad expectation of the market is that rate cuts in the US would mean the US$ depreciates and there is more liquidity in the US markets, which eventually results in inflows into the Indian equity markets.
However, that might not pan out that way. Of course, the first reason is the high valuation the Indian market is trading at, at the moment. And the second is that, historically lower rates haven’t really translated into inflows into India.
During the previous Fed rate cut cycles (2007–2009), the Indian equity markets saw net outflows of Rs. 39,346 crore. A similar trend was also seen during 2019-2020, where despite policy easing in the US, the Indian markets saw a net outflow of Rs. 29,847 crore.
The RBI faces pressure to cut, and follows suit.
With the US Fed cutting rates, the Reserve Bank of India (RBI) is under pressure to follow suit, and cut repo rates. We anticipate that the RBI will cut the repo rate by 75 bps over the next three to four quarters.
However, it is difficult to point at when the rate cut cycle begins for India given differences with the US markets - especially around food inflation and underlying economic growth.
Impact on the Markets
The single largest impact of rate hikes is usually on the banking sector, which has been witnessing a dream run lately. However, there could be multiple layers to this:
When rates are hiked, Net Interest Margins (NIMs) go up, and when rates are cut, NIMs move lower. NIMs indicate the profitability for banks - they are simply the interest earned from lending minus the interest paid to depositors. Overall, not so great for banks
The other impact of rate changes is on investment securities held by banks. If a bank’s assets are not ‘held to maturity’, rate cuts will result in unrealised gains (and vice versa), beefing up the bank’s financials when rates are cut. Good for banks with high non-HTM portfolios
Banks that are largely wholesale funded (lending to corporates, institutions, etc.), and NBFCs tend to perform better during rate cuts compared to retail funded banks, since loans reset promptly on rate cuts
Other than that, the markets seem to be excited by the rate cuts in the US, and the prospect of cuts in India - evident from last week’s move. However, we expect profit booking to take place over the coming week.
It’s also worth noting that the Nifty 500 index has consistently closed in the green for the past 11 months, a phenomenon last seen a decade ago. We anticipate that some profit booking could occur in the next week or two.
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