Higher FD rates, stocks market correction to test retail investors: Kotak


The current round of correction in Indian stock markets will test the retail investors’ appetite for equities, says Kotak Institutional Equities in a note. Hawkish stance by the Fed, rate hikes by RBI and other central banks have created an atmosphere of risk-off for equities. After correcting nearly 4% last week, the Nifty was down around 1% today. 

“In our view, a combination of low returns from the market (if the market was to stay flat or decline) and higher fixed deposit rates over the next few months may shake the faith of retail investors in equities. Retail investors have been impervious to high market valuations and rising bond yields, with return expectations anchored by historical high returns and ‘risk’ expectations by low fixed deposit rates,” Kotak said the note. 

After RBI rate hike, many banks have been raised interest rates.

According to Kotak, valuations are still high in Indian markets and inflation will start declining (simply due to high base effect). However, the brokerage added, higher-than-expected oil price remains one big risk to the market now.

Kotak expects domestic inflation to start tapering down in second half of FY23 once base-effect starts kicking even as prices may stay at elevated levels due to continued global and domestic supply-side issues. 

On the other hand, the brokerage does not see large demand destruction in India from moderate interest rate increases. 

“Domestic bond yields may be peaking unless oil prices were to surprise massively on the upside. India can get away with another 70-100 bps rate increase even at oil at US$120/bbl—policy rate of 5.25-5.5% (current 4.4%) and end-FY2023 inflation at 4.5-5% is not a bad outcome. However, higher-than-expected oil prices pose upside risks to inflation .”

Equity markets, Kotak says, are only partly pricing in higher interest rates despite high bond yields.

“The sharp increase in global and domestic bond yields over the past few weeks would suggest that bond markets are generally pricing in elevated inflation and higher interest rates even as several central banks have finally started raising rates to counter high inflation. This is especially true both for the US and India given the large gap between bond yields and policy rates,” it added. 

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