Risk to the equity market may come from Bond Street: S Naren

Thus far, the macroeconomic handling of the economy since the Covid period has been exceptional as the government has managed to rein in fiscal, current account deficit and inflation, along with the support of RBI through its monetary policy. The expectation from the equity market side was minimal as the market was buoyant, economy was relatively robust and corporates were in fine fettle.

However, the challenge has come from the fixed income side. While the global environment is no longer benign and interest rates are edging higher in most parts of the world, we believed interest rate increase would be moderated with steps to help inclusion in the Bond Markets Index. However, there was no announcement on this front. Considering that the borrowing programme is significant in 2022-23, the bond market reacted sharply, pushing yields higher. Hence, we believe the risk to the equity market is likely to emanate from the bond market in the near term.

We believe that the economy and the corporates at large are in good shape, and hence, do not represent any major challenge. The budget through its stable tax policy, focus on programmes to encourage capex and digitisation of the economy, focus on consolidation in taxation by reduction in fiscal deficit has made all steps in the right direction from an equity market point of view.

Investors should be watchful of the challenges which could precipitate due to increasing interest rate environment and liquidity tightening globally and increasing interest rate in the domestic market as Indian interest rates are at much higher levels when compared to global peers at this point in time. Therefore, we believe that any reduction in interest rate increase being moderated through steps by the government/central bank particularly in the longer duration areas would notably help the cause of the economy and equity markets as India’s inflation compared to global inflation is no longer significantly higher.

The budget is a progressive continuation of the reforms announced, which is a positive for the equity market. We are sanguine about what has been done for the economy at large. In sectoral terms, infrastructure, telecom, manufacturing, real estate, capital goods and cement companies are likely to be the beneficiaries of the various announcements made. Interestingly, each of these areas was the one which required support at this point in the economic cycle.