Vinod Bhat's Market Pulse - Feb 28, 2023
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Key risk for equity markets currently are higher interest rates and market pricing of peak Central Bank policy rate is rising at a quick pace.
Recent US inflation data suggest that the monetary policy fight to tame inflation may be long-drawn, contrary to earlier expectations. The hopes of a rapid softening on inflation seems to be dissipating given continued strength in the US labor market.
Peak Fed rate projections have increased in recent weeks to 5.4%, with equity markets gradually reconciling to the ‘higher-for-longer’ view. There are some extreme views with higher peak rate projections also.
In India too, there are increasing risks of a tighter monetary policy in India following higher global policy rates and upside risks to domestic inflation, especially due to higher food and fuel prices.
We are expecting only one more rate hike by RBI to take the policy rate to 6.75%. But domestic bond yields have already started pricing a peak repo rate close to 7%, based on 1-year OIS rates.
Growth stocks may face a challenging time this year while quality stocks providing high earnings visibility and with reasonable valuations may fare better.