D-Street valuations quite expensive even without factoring in rate hikes: Kotak Institutional Equities
Indian equities market valuations are quite expensive without factoring in significant rate hikes from current levels, said brokerage firm Kotak Institutional Equities.
Primarily, valuations of consumption as well as investment stocks are way higher than historical levels. The market typically expects a fast normalization in respect of both interest rates as well as growth, the brokerage noted.
On the interest rate front, the brokerage assumed 6% as the outer limit for policy rates in the current rate cycle (another 60 bps from current levels) based on its view on domestic inflation. Nevertheless, given the global macroeconomic pressures, the brokerage said it is no longer sure about it. The bi-monthly RBI monetary policy meet is scheduled for September 28-30.
The US Fed, in its recent monetary policy outcome, prioritized inflation over growth and hiked interest rates by 75 bps. At the same time, it reiterated its hawkish stance with aggressive rate hike moves going forward. Taking note the market is essentially factoring in higher US Fed rates through calendar year 2023.
Post the Fed decision, Indian equities have corrected by a sharp percentage in just three trading sessions, with the Nifty losing 700 points or 4%.
Such global macro-developments are perceived to be negative for India’s economic growth by the brokerage. The brokerage said that the RBI may hike interest rates by a higher quantum to curb the rapid fall in the Indian currency despite likely moderation in domestic inflation in the next few months. Also, it may have to confront lower exports given the likely slowdown in global economic growth as most other central banks raise rates to counter the sharp increases by the US Fed.
Amid such a backdrop, the brokerage noted that the nominal and real interest rate differential between the US and India is still not favourable enough for India. Also, the RBI would need to consider potential higher energy prices, which can be another source of inflation.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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