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India Market Outlook

India Market Outlook

After raising policy rates at the steepest pace in over four decades to combat inflation, the US Fed embarked on an easing cycle in its September policy meeting. In this blog, we explore the potential impact of this policy shift on Indian markets.

Historically, onshore bonds have been a consistent performer around the start of a Fed easing cycle. Equities have generally traded weakly, heading into the easing cycle, contrary to what we have witnessed in the current cycle. The Indian Rupee (INR) has remained stable and strengthened modestly over the 1-3 months into the easing cycle.

As the US Fed starts to cut policy rates after holding it close to 23-year highs, we analyse the past to see how Indian assets performed around the easing cycles and how investors can position their portfolios to capitalise on this shift:

Bonds: A Consistent Performer

Indian bonds performed well around the first Fed rate cut and continue to do so into the easing cycle. The 10-year Indian government bond yields declined an average of 57 basis points over 3- months ahead of the first-rate cut and continued to trend lower in the following 6-12 months.

Equities: Mixed Performance

Equities have traded weak ahead of the start of an easing cycle. The nifty index fell an average of 10% in the 12 months preceding the first rate cut. Performance following the first cut is broadly positive in the immediate short term in terms of improving foreign inflows amid a weaker USD. Over the following 6-12 months, performance tends to be mixed as global growth challenges start to emerge.

USD/INR- Stable in the Near Term

INR has displayed stability heading into the easing cycle, strengthening modestly over 1-3 months into the cycle, supported by a decline in the USD and improved foreign capital inflows.  

Will the Market Repeat the Historical Performance?

The current market cycle differs from the previous cycles, except for 2007. Over the past 12 months, the Nifty index has been up 26%, the yield on 10-year Indian government bonds has been down 42 basis points, and the INR has depreciated 1% against the USD.

In the current cycle, Indian assets are expected to be driven by developments in domestic and global economies and the RBI’s monetary policy response to shifts in growth-inflation dynamics. The resilience of domestic equities and stretched valuation premiums discount many positives—strong macro, resilient earnings, and government and policy continuity. This may lead to a near-term pullback.

Volatility may remain high in the near term due to upcoming elections in the US and key Indian states, geopolitical tensions, and growth uncertainty in global markets. In this scenario, a prudent approach is to opt for a diversified asset allocation with neutral allocations to equities, bonds, gold, and cash.

Our asset-class outlook:

We see an improved risk-reward for bonds on a positive supply-demand balance, with the government sticking to the fiscal consolidation path and robust foreign investor inflows from index-tracking funds. We are overweight medium and long-maturity and high-quality corporate bonds with attractive absolute yields. Within equities, large caps provide a higher margin of safety in terms of earnings and valuations, along with stronger balance sheets to cushion the impact of tighter financial conditions. In terms of sectors, growth opportunities can be expected in industrials, financials and consumer staples. On the other hand, gold remains a key hedge in the portfolio.