India has decided to strike out on its own when it comes to rate cuts, holding steady when other major economies like the US and China are hacking away.
India’s central bank is betting that more consumer spending will keep the world’s fastest-growing economy chugging along. And that an uptick in the global price of food and metal is, on balance, more of a worry than whatever’s happening in China.
Indian markets seem unperturbed. The benchmark index Nifty 50 was up a 0.68% on Wednesday morning.
The question is whether India’s dislocation risks driving “hot money” across the border. A massive stimulus package has put Chinese stocks back on the radar for foreign investors, even though the recent hot streak is showing signs of fizzling out.
Garima Kapoor, economist with Elara Capital, says that China will probably outperform peers in terms of stock market returns. But higher rates could boost the Indian carry trade because investors can borrow cheaply in the US and elsewhere and invest in Indian debt for higher return.
Mixed picture
- India kept its key lending rate unchanged at 6.5%. The central bank changed its stance from “withdrawal of accommodation” to “neutral,” which doesn’t indicate whether a cut is looming or not.
- The central bank raised its GDP growth projection for this financial year by half a percentage point to 7.2%.
- It expects inflation to rise to 4.5% on average in the near term, before declining to 4.3% in the next financial year, which begins in April.
What’s the play?
For now, investors could look at large caps and defensive sectors, such as its large state-run companies.
And although a rate cut is expected eventually, how soon is anybody’s guess. So, you might look for cues in improving economic indicators and choose companies with better second-quarter earnings (earnings season starts this week).
