- Traders are betting India’s record-breaking stock rally still has legs, fueled by expectations of continued dovish monetary policy even as inflation fears deepen.
- The nation’s NSE Nifty 50 Index has more than doubled from a March 2020 low — one of the best performers in the world over the period and testing new peaks almost every month.
- It is also among Asia’s top gainers this month, beating the regional benchmark by about 4 percentage points.
Why bull run?
- Breaking with other emerging-market central banks that have either hiked or indicated higher rates,
- The Reserve Bank of India has held a dovish stance as its governor believes price gains are transitory.
- Overseas investors are taking notice, with net inflows amounting to about $7 billion so far this year, the highest among emerging markets in Asia.
- “The RBI has kept its stimulus policy easy and is likely to keep it like that for the months to come, and that will continue to support the stock market,“
- Said Tom Masi and Nuno Fernandes, New York-based portfolio managers at GW&K Investment Management.
Diversion of investment
- Consumer prices rose more than 6% in both May and June, driven by higher food and energy costs.
- That has dented returns from traditional sources such as bank deposits and sent individual investors to stock trading for juicier gains.
- Market players expect retail participation to rise further after 14 million new first-time electronic accounts were opened in the fiscal year through March 2021.
- While low-interest rates and ample liquidity are the major factors for increased interest in equities, any reversal in easy policywould impact the market,
- Said Ajay Tyagi, chairman of the Securities and Exchange Board of India, the market’s regulator on Thursday.
- The RBI has kept interest rates at a record low since May last year and injected unprecedented liquidity into the banking system.
- Indeed some equity markets have taken a hit after a hawkish turn by their central banks.
- In South Korea, where the Bank of Korea signalled policy normalization this month, stocks declined by more than 1% in July.
- Equities have also retreated in Russia and Brazil where the central banks have already started raising rates.
Growth Vs inflation
- Rising inflation may force the RBI to tighten policies although many believe chances are low for such a movein the near future.
- Growth is still considered a priority by the central bank even as new local Covid-19 cases slow.
- Investors are optimistic the RBI will continue to keep its policy accommodative, a move that will support stocks.
Which of policy of RBI represents a contractionary monetary policy?
- Reduction in interest rates
- Reduction in CRR & SLR
- Purchase of foreign currency
- Sale of government Bonds