Mumbai: A hiccup in India's world-beating economic growth may exacerbate near-term weakness in stocks, according to strategists.
The economy expanded at the slowest pace in almost two years in the September quarter, data show. Market participants expect a pickup in growth in the second-half of the fiscal year, especially if the Reserve Bank of India cuts interest rates or slashes the share of deposits lenders must set aside.
Concerns about the economy and valuations have India's NSE Nifty 50 Index about 8% down from a September record. Foreign investors pulled out $2.6 billion from equities last month after a record monthly withdrawal in October.
On Monday, the stocks gauge fell as much as 0.5% in early trading, while the MSCI Asia Pacific Index gained as much as 0.6%. Meanwhile, the rupee fell 0.1% against the US dollar, on course to mark yet another record low this year.
The Indian rupee declined to a new all-time low after data showed a sharp slowdown in the economic growth. Bonds extended gains on bets the central bank may cut interest rates sooner than anticipated.
The rupee fell 0.2% to 84.6637 per dollar after a government report on Friday showed the economy grew at the slowest pace in almost two years. A stronger dollar spurred by US President-elect Donald Trump demanding a commitment from BRICS nations to using the greenback also weighed on emerging-market assets.
"The meaningful miss in GDP for India increases the chance that RBI will intervene less aggressively and allow USD/INR to move higher over time in an orderly fashion," said Michael Wan, senior currency analyst at MUFG Bank.
India's five-year bond yield tumbled nearly six basis points to 6.62% as traders continued to bet on easing measures by the Reserve Bank of India, which is due to announce its rate decision on Dec. 6.
Lining up for an RBI rate cut?
"This should trigger some near-term weakness in the markets, but some of this was already known and partially priced in," says a note from analysts at Emkay Global Financial Services Ltd.. “"We do not see the case for a major market selloff but reiterate that near-term upside is also limited due to earnings weakness and valuations."
The year-end Nifty target remains 25,000, and ‘an incremental correction over 5% in the Nifty is an entry opportunity’.
‘A silver lining is that the weak growth opens the door for an RBI rate cut’, this month.
A weak GDP print was already getting reflected in corporate earnings and we believe that the worst of earnings cuts is likely behind’, says analysts at Jefferies Financial Group Inc.
Still, a much tighter fiscal 2025 is on the cards, driving yields lower. The possibility of a cut in cash reserve ratio, or a reduction in the share of deposits lenders must set aside, increases.
According to Wan at MUFG Bank, “From an FX perspective, the key question is whether this growth blip proves to be short-lived or something more pernicious. The growth slowdown is likely to have been driven also by restrictive monetary policy and the RBI's moves to tighten macro-prudential measures and these factors could continue to weigh on portfolio flows.
“From a rates perspective, this week's RBI rate meeting is likely to be a close one, with possible increasing dissent out of some members. There may also be moves to cut the cash reserve ratio requirements to help boost banking system liquidity.”
