Fed’s dovish stance likely to boost foreign inflows in Indian equities, says Emkay

The recent dovish stance adopted by the Federal Reserve has injected a new bullish fervour into the market, creating a complex scenario for India's economic strategy, according to the brokerage firm Emkay. While the earnings impact of lower rates may be subdued, higher foreign portfolio investment (FPI) flows are expected to drive market re-rating.

Against the backdrop of post-election policy stability and robust capex and manufacturing cycles, the equity market is anticipated to maintain its strength. 

Rate cut outlook

The Federal Reserve's dovish comments indicate a potential cycle of three rate cuts in CY24, prompting expectations of concurrent rate cuts by the Reserve Bank of India (RBI). 

The impact is likely to be more pronounced at the short end, with limited effects on the real economy due to low corporate leverage. The unique nature of this rate cycle suggests that its impact on corporate earnings will be limited, presenting opportunities for key beneficiaries such as banks with low floating rate loans, non-housing Non-Banking Financial Companies (NBFCs), life insurance companies, and the real estate sector.

FPI flows, market attractiveness

Foreign Portfolio Investment (FPI) flows have exhibited strength in the latter half of CY23, and this momentum is expected to intensify with a resurgence of risk-on trades. 

FPIs have so far this month invested Rs 42,733 crore in Indian equities, marking the best monthly inflows since September when they sold shares of Rs 14,768 crore.

India, given its size and growth profile, remains one of the most attractive emerging markets, particularly in comparison to challenges associated with investing in China, the brokerage added.

Historical trends and investment strategies

Examining historical trends in rate-cut cycles reveals mixed results for equities, with a positive reaction observed three out of four times. The current cycle, however, is unique as it commences amidst strong economic growth.

Mid-size financials, IT, and real estate emerge as promising plays, with a focus on Small and Medium-sized Enterprises (SMIDs) and manufacturing. Cautious optimism is expressed for consumption, with autos being an exception. 

Emkay said, “IndusInd, Piramal Enterprises, Hero MotoCorp, Infosys, and Zomato are identified as its top picks based on their alignment with key themes and sectors in this dynamic landscape.”