The Reserve Bank of India (RBI) is widely expected to lower its main lending rate on Tuesday, providing a sigh of relief to weary companies battling to bolster demand ahead of the country’s biggest festival season as well as to stock markets reeling from redemption-pressured selling by global funds.

Inflation at multi-year lows — consumer prices running at an annual rate of 3.66 per cent in August, while wholesale inflation plummeted 4.95 per cent — has prepared the ground for the central bank to ease monetary policy. Most economists expect the RBI to cut the repo rate to 7.00 per cent from 7.25 per cent now.

It would be the fourth reduction this year after the RBI kicked off a 25 basis points cut in mid-January to support a spluttering economic recovery, and provide a leg up to the government’s moves to revive investment and create jobs.

Deutsche economists Taimur Baig and Kaushik Das said that real interest rates in India were higher than in other emerging market peers such as China and Indonesia.

“As a result, from a cost-benefit perspective, India likely stands to gain more from a rate cut at this stage,” they wrote in a report to their clients. “With reserves adequacy strength having improved materially, an incremental rate cut of 25 basis points is unlikely to pose any significant threat to India’s broader financial market and exchange rate stability, in our view.”

Funds selling

Global funds facing redemption pressure are exiting shares as deteriorating Chinese economic activity sour investor appetite for risk assets across the world. The sell-off has hit India too because it is relatively better off than its peers, providing fund managers an opportunity to make up for shortfall elsewhere.

Exchange and other data showed that foreign funds dumped Indian shares worth more than $610 million this month, including a net $195 million on Wednesday after a survey indicated that Beijing is probably staring at the weakest manufacturing since 2009. Coming on top of $2.6 billion (Dh9.54 billion) pulled out by overseas funds in August, the outflow is again hurting share prices in India.

The top-30 Sensex and the broader 50-share Nifty posted their first weekly fall in three, shedding 1.4 per cent apiece. Sentiment was also weighed down after Asian Development Bank lowered its growth forecast for developing countries in Asia. The Manila-based bank said growth in China could cool to 6.8 per cent this year from 7.3 per cent in 2014, and further drop to 6.7 per cent in 2016. It expects India to expand at 7.4 per cent and 7.8 per cent respectively in this year and next, slower than its July forecasts of 7.8 per cent and 8.2 per cent.

Confusing signals from US Federal Reserve have added to the investor worries. Within days after holding rates at near zero, citing global headwinds, officials have started to hint at a possible increase before the year ends. This has put speculation on the “lift-off” on top of the market agenda again. An increase in US rates — it would be the first since 2006 — would accelerate cash outflows from emerging markets.

Opportunity beckons

The gloom scenario, however, presents an opportunity to build a portfolio. Investors looking for robust longer term returns should not be dismayed by volatile price moves. Instead, they should grab good stocks as they dip and they will be rewarded as earnings pick up on the back of improving economic activity.

“I’m now reversing my caution,” Robert Parker, a senior executive at Credit Suisse told ET Now TV channel, referring to the investment bank’s stance on Indian markets. “In terms of where we go from here, the economic news out of India is now looking much more positive and most importantly, it is looking much more positive in terms of growth, inflation, relative to other emerging economies.”

The global commodity slump provides a big cushion to New Delhi, a big importer of items such as crude oil, fertilisers, edible oil and minerals. Lower raw material costs should help companies to bring down prices, spur demand and safeguard their profit margins.

The widely followed Sensex, which closed at 25,863.50 this week, has dropped 16.1 per cent from its peak of 30,024.74 in early March, making the benchmark more acceptable for fund managers to bet on.

“What was an overvalued market at the beginning of the year has actually become reasonably valued now,” Parker said. “I would not say we have gone to being cheap, but certainly we are reasonably valued.”

Stocks on the move

When shares beat heavy odds and climb investors should sit up and take notice. Lupin Ltd, a drugmaker that has been increasing its foray into the lucrative US market, has jumped 39 per cent so far this year — while the Sensex has dropped 6 per cent in year-to-date — making the stock the biggest gainer in the benchmark.

Maruti Suzuki, which produces every second new car sold in India, is giving hot chase in the top-performing sweepstakes. The stock has climbed 37 per cent since the start of the year and looks good to race more with demand for its vehicles on the rise. Petrol and diesel prices are down 10 to 20 per cent from a year earlier.

Lower borrowing costs and falling raw material prices should also underpin other companies. Barclays Capital Inc recently added Godrej Consumer Products, which has high urban exposure, to its list of best stock ideas in place of Titan. The securities house remains overweight on private sector banks.

“Our best stock ideas are Axis Bank, Container Corp of India, Dr Reddy’s, HDFC Bank, Godrej Consumer, Maruti Suzuki, State Bank of India, Tata Motors and UltraTech Cement,” analysts at Barclays said in a report.

The writer is a journalist based in India.