Winning streak enters day five, cheer after surprise RBI pause

The RBI highlighted the economy’s resilience and projected that the Gross Domestic Product (GDP) for FY24 will grow at a rate of 6.5 percent, which is slightly higher than the earlier estimate of 6.4 percent.

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Indian markets gained for the fifth session on 6 April after in a surprise move the Reserve Bank of India kept rates unchanged. Sensex and Nifty rose 0.39 percent each led by gains in banking and financial stocks. Bajaj Finance advanced 2.1 percent, State Bank of India and Indusind Bank gained 1.8 percent each, Bajaj Finserv climbed 1.4 percent. L&T advanced 1 percent after Jefferies India maintained buy rating and increased its target price by 22 percent.

The Reserve Bank of India (RBI) has kept rates unchanged and revised its inflation projections, estimating that the Consumer Price Index (CPI) will average 5.2 percent in FY24, which is a slight improvement from the earlier estimate of 5.3 percent. The RBI also highlighted the economy’s resilience and projected that the Gross Domestic Product (GDP) for FY24 will grow at a rate of 6.5 percent, which is slightly higher than the earlier estimate of 6.4 percent.

“In our view, this reflects a forward-looking monetary policy that takes into cognizance elevated global growth risks, under-control inflation trajectory, and the need to wait-and-watch and assess the impact of the sharp policy tightening already delivered. However, the RBI has kept the door open to further action if macro conditions change, also in line with our expectations. We maintain our view of a policy pause hereon and 75bp of rate cuts, starting from October,” said  Aurodeep Nandi, India Economist and Vice President at Nomura.

Here are some factors behind the fifth session rally in Sensex and Nifty:

RBI rate pause: In an unexpected move, the Reserve Bank of India has chosen to maintain its policy rates amid growing uncertainty in the global banking sector, while also vowing to raise rates if necessary. The six-member Monetary Policy Committee voted unanimously on Thursday to maintain the repurchase rate at 6.50 percent, a decision that was only predicted by six of the 33 economists surveyed by Bloomberg. The remaining economists had expected a quarter-point increase. The panel also confirmed its policy stance of “withdrawal of accommodation,” which it has maintained since beginning its tightening process in May 2022.

Strong provisional numbers by banks: Recent provisional data shows that private sector banks have reported strong growth in credit and deposits during the fiscal fourth quarter, with some banks surpassing the industry average. HDFC Bank, Indusind Bank, Yes Bank, Federal Bank, and Bandhan Bank have all released provisional business numbers ahead of their financial results for the quarter ended March 2023. In the March quarter, HDFC Bank reported a 20 percent increase in deposits and a 16.9 percent increase in credit. Federal Bank saw a 17.4 percent increase in deposits and a 20.2 percent increase in loans. Indusind Bank reported a 14.6 percent increase in deposits and a 21.3 percent increase in loans. Additionally, Bajaj Finance disclosed a 20 percent increase in new loan bookings for the quarter ended March 31, with 7.6 million bookings compared to 6.3 million in the same quarter of the previous fiscal year. Furthermore, Bajaj Finance recorded its highest-ever new loans of 29.6 million for the entire financial year 2022-2023.

Moderating Valuations: Analysts postulate that the recent buying is due to moderating valuations. According to Jefferies, the recent market correction has led to more reasonable valuations, with the price-to-earnings ratio for 1-year forward earnings currently standing at 17.2x. Moreover, 56 out of the Nifty100 stocks are now trading below their 10-year historical average. Additionally, certain financials, select auto companies, and pharmaceutical stocks are trading at a discount to their historical average. The analysis of Nifty100 stocks indicates that a majority of them (56) is currently trading at a discount to their long-term average valuation, which is either based on a 10-year period or since their listing. On a consensus basis, less than a quarter of these companies are trading more than 15 percent above their long-term valuation averages. Notably, the financial sector (including banks and insurance companies), original equipment manufacturers in the automotive industry, and several pharmaceutical companies are among the sectors with a significant discount to their average valuations.

CAD, PMI improves:  According to data released on April 3, India’s manufacturing sector maintained its growth momentum in March, with the S&P Global Purchasing Managers’ Index (PMI) rising to 56.4 from February’s 55.3. A reading above 50 denotes an expansion in activity, while a sub-50 score indicates a contraction. This is the 21st consecutive month that India’s manufacturing PMI has exceeded 50.  In February, the services PMI reached a 12-year high of 59.4, according to data released last month.

India’s current account deficit fell more than expected to $18.2 billion – or 2.2 percent of GDP – in October-December, data released on March 31 showed. The deficit for July-September was lowered to $30.9 billion from an all-time high of $36.4 billion “due to downward adjustment in customs data,” the Reserve Bank of India said. According to the latest reports, many economists expect that India’s current account is expected to improve in the fiscal year 2024 led by incrementally improving trade deficit amid receding commodity prices, especially oil. “Also, solid services trade surplus will strongly offset CAD, which will now likely print sub $100billion in FY23E ($90billion vs our earlier forecast of $107bn)… For FY24E, lower prices of oil (avg. estimate: $90/bbl) and commodities, along with easing domestic/global demand, may lead to CAD/GDP lowering to ~2.2 percent vs our earlier est. of 2.6percent ($82 billion vs $97 billion earlier),” said Emkay Research in its latest report.