Hopes of rate cut boosts Investing in Equity & SIP - AxisDirect
Jul 28, 2017 | Source: Livemint
Hope of Rate Cuts Boots Equity Buying
When Federal Reserve taper fears jolted emerging markets in 2013, India was one of the affected countries and was forced to raise interest rates.
Fast forward to 2017, and history has been turned on its head. Not only is the US central bank raising rates, but India is widely expected next week to be the first country in Asia to cut policy rates in 2017.
And rather than being concerned at India’s falling policy rate premium over the US, foreign investors are giving the country’s markets the thumbs up.
The rupee is rallying and the country’s bonds are in demand, offering some of the best inflation-adjusted returns in Asia. Inflation, long a thorn in the economy, is at its lowest in five years, economic growth is picking up and the current account deficit is on a decline.
India’s biggest tax reform since independence in 1947 i.e. GST, is raising confidence among investors that other measures to boost the economy would follow.
Investors have bought a net $8.8 billion in shares, more than the combined $6.3 billion of the previous two years, helping push indexes to record highs.
Foreign buyers have almost exhausted their quota in debt with net purchases of $21 billion in 2017—including record high inflows for a January-June period—after net sales of $6 billion in 2016.
Long positions in the rupee are the highest among major Asian currencies and almost double those of the second-placed Malaysian ringgit, a Reuters poll shows.
At a review on Wednesday, the Reserve Bank of India (RBI) is expected to cut its policy rate by 25 basis points to 6%, which would be its lowest level in more than six years.
Indian consumer price inflation is now 1.54%, boosting the 10-year bond’s real interest rate to 4.9%, the highest in Asia and nearly double the rate of Indonesia, another popular emerging market investment destination.
The rupee has rallied 5.6% against the dollar in 2017 so far and volatility in the exchange rate is its lowest since mid-August, a reassuring signal for investors.
The current account deficit has narrowed to just 0.6% of gross domestic product (GDP) from a record 4.8% in 2013, while foreign exchange reserves hit a record $389.1 billion as of 14 July.
Owing to all these factors the economic growth is expected to rise to 7.3% in the fiscal year to March from 7.1% in 2016, a Reuters poll shows.
There is strong positive economic landscape laid down for investors to start and continue investing in equity markets and SIPs consistently for a long term period.