July FOMC meeting was a major event with a 75 bp increase in USA interest rates. Fed Chairman indicated that he is likely to focus more on USA employment numbers, due on Aug 5, as compared to GDP growth numbers and the future moves will be data dependent.
However, the market focussed on the dovish aspect of the statement about possible reduction of future pace and quantum of interest rate hikes. USA equity markets have come up smartly during the last 3 weeks. Bond yields came down though volatile conditions persist. Commodity prices including Oil have come down and therefore, inflationary numbers might start showing a decline.
Currently, the opinion is quite divided in the USA on whether the current up move is a bear market rally or a resumption of the bull market. If Federal Reserve retains its hawkish stance, the market can again come down.
Indian markets have also done well in conjunction with the global markets. RBI monetary policy committee is on August 5 and there is a good probability of a 50 bp hike. Protection of INR will be an important reason for raising rates. INR had fallen below Rs 80 /USD though has now recovered slightly. It has done well against other currencies like GBP, Euro, and JPY which have fallen more against USD.
The high correlation with the global markets continues but there is a probability of decoupling where Indian markets can do better. In one of my earlier articles, I had written that Indian economic growth is more robust while the inflation pressures are less. While global developments will continue to have a significant impact, the Indian markets have a much higher probability of outperforming.
Our medium-term view of Indian equities, therefore, remains bullish and we continue to recommend equity positions for goals with a time horizon of more than 3 years. Money should mainly be invested in well-chosen high-quality diversified equity schemes. Additionally, the banking sector, given its valuations and the current economic cycle stage, is attractive. The infrastructure sector is also likely to perform well because of the government’s sustained push and spending.
The technology sector in India continues to remain strong and is again attractive because of the recent correction. It is always important to maintain good amounts in your liquidity and contingency fund. Those should be in ultrashort-term debt funds in the current scenario of rising and volatile interest rates.
