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If softening of inflation continues further, then it would eventually lead Fed to taper its aggression: Sneha Poddar

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Sneha Poddar, AVP Research, Broking & Distribution, Motilal Oswal Financial Services, said if the softening of inflation continues further, then it would eventually lead to the US Federal Reserve to taper its aggression. The Reserve Bank of India (RBI) is more likely to follow the US Fed and thus would not taper its tone till its is adopted by the latter.

Here are excerpts from the interview:

Q. Do you think after US CPI inflation print which came below estimates will allow Fed to go slow on rate hike, and RBI will follow the same?

A: The US CPI inflation data for the month of July came in at 8.5 per cent, down from 9.1 per cent in June and slightly below expectation of 8.7 per cent. However the Fed officials have responded to softening inflation data by saying it doesn’t change their stance towards higher interest rates, as the inflation still remains above the unacceptable levels. Since this is just first sign of inflation peaking out, and is too early to rule out subsequent high inflation data, uncertainty will loom over when the US Fed would slow down on its aggressive rate hikes. If the softening of inflation continues further, then it would eventually lead Fed to taper its aggression. The RBI is more likely to follow US Fed and thus would not taper its tone till its is adopted by US Fed.

Q. 5.40 per cent repo rate is already above pre-pandemic level, but still the RBI maintains “withdrawal of accomodation” stance. Do you think the neutral level of the repo rate is at or above 6 per cent?

A: The RBI has cumulatively hiked the policy repo rate by 140bp to 5.4 per cent in FY23 till date. It reiterated its continued focus on “withdrawal of accommodation” to contain inflation while supporting growth. However, it kept its inflation/growth forecasts unchanged at 6.7 per cent/7.2 per cent YoY, respectively, for FY23. This seems very confusing as how can the rate hikes help contain inflation without hurting growth? Further, the MPC did not sound dovish at all. There was neither a change in stance nor a relief in the RBI Governor’s statement disclaiming a possible pause in rate hikes. Thus we believe that the terminal rate in this hike cycle might be at 5.75-6.0 per cent

Q. In the current market conditions, which sectors are likely to perform well from an investor returns point-of-view?

A: We believe BFSI can do well in rising interest rate scenario. On the other hand with good monsoon, upcoming festive season and softening of commodity prices, the demand both urban and rural are expected to revive and pick up and thus we are positive on Consumer, Auto and Retail. With the opening up of economy and the structural shift being witnessed in favour of the industry post Covid, QSR remains in a sweet spot. While uncertainty around quantum of interest rate hikes is likely to impact the performance of real estate stocks in the near term, longer-term thesis on revival of housing cycle remains intact. There is imminent opportunity in the domestic Hospitality industry and the expected upcycle bodes well for the sector. We are selectively looking at IT sector as valuations have become attractive for accumulation from long term perspective.

Q. Where you see levels on benchmark indices going forward considering the FI inflows in the domestic equities?

A: Strong momentum in the market has helped Nifty rally by more than 2500 points from June lows, and thus, has wiped out the entire decline for the calendar year till date and turned positive. Strong macro data, FII turning positive, steady earnings and healthy progress in monsoon have been some of the key factors supporting the market. FIIs (including primary market) turned positive for the month of July after nine months of continuous outflows and has been continuous buyer throughout the month of August so far. With the softening of commodity prices, even inflation seems to be peaking out and festive season is about to begin which should support demand and thus corporate earnings. Thus the overall trend in the market seems to be positive, however bouts of volatility can’t be ruled out as uncertainty over rate hike quantum and China-Taiwan tussle continues. Further, with this recent rally, Nifty now trades at ~20x FY23E, above its 10-year average, thus offering limited upside in the near term. Going forward, it could be a tug of war between domestic and global factors which could determine the market direction.

Business

Banks Expect Increased Credit Demand Across Retail, MSME, & Agricultural Segments After GST Reforms

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New Delhi: With the Goods and Services Tax (GST) reforms, banks expect increased credit demand across retail, MSME, and agricultural segments as incomes rise and business investment picks up.

According to Ajay Kumar Srivastava, MD and CEO, Indian Overseas Bank, the reform will create a strong effect across the economy, leading to improved cashflows for distributors and retailers, greater working capital access for small businesses, and expanded credit requirements amid rising demand.

“Overall, this decision acts as a catalyst for inclusive growth and economic transformation aligning itself to India’s vision of Viksit Bharat”, said Srivastava. This move makes taxation more transparent and easier to follow. “We expect these measures will drive an estimated growth in consumption over 8-10 per cent in the next two quarters in rural markets, particularly benefiting farmers through reduced costs on agricultural products where GST has been brought down from the 12 per cent to 5 per cent,” according to Srivastava.

The price cuts on daily essentials like dairy products, household items, and consumer durables will provide more relief and reduce the burden to the consumers. The reduced GST on vehicles, electronics, and housing materials will create demand for these segments, while making insurance policies completely tax-free will enhance financial inclusion.

According to Sanjay Agarwal, Senior Director, CareEdge Ratings, GST rate cuts result in a decrease in the final price of goods and services, which enhances consumer purchasing power and could stimulate demand across various sectors.

The impact is generally visible in the consumer durables segment. Lower GST rates on automobiles, electronics, and appliances not only make these products more affordable but also expand the addressable market to include price-sensitive consumers who were previously priced out.

“Banks could see an increase in auto loans, personal loans for electronics purchases,” he mentioned. Outstanding housing loans, vehicle loans, credit card and consumer durables account for around 16.7 per cent, 3.5 per cent, 1.6 per cent and 0.1 per cent of banking credit, respectively.

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Business

Auto Stocks Zoom On GST Rate Cuts, Hyundai Tops Gainers As Market Anticipates Festive Season Boost

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Mumbai: On Friday, auto stocks saw a strong rally after the GST Council’s decision to cut tax rates on small cars and motorcycles. The BSE Auto Index rose by 1.30 percent, closing at 58,883.09 points. This surge came as the market responded positively to the new two-slab GST system — 5 percent and 18 percent — announced to take effect from September 22, the first day of Navaratri.

Hyundai Motor India led the auto sector gains, rising 2.69 percent on the BSE. Other top performers included Eicher Motors (+2.43 percent), Mahindra & Mahindra (+2.34 percent), and Ashok Leyland (+2.22 percent).

Maruti Suzuki also climbed 1.70 percent, while TVS Motor went up 1.28 percent. Smaller gains were seen in Sona BLW (0.80 percent), Bharat Forge (0.77 percent), Tata Motors (0.63 percent), Bajaj Auto (0.22 percent), and Hero MotoCorp (0.21 percent).

The reduction in GST rates from 28 percent to 18 percent on many popular vehicle categories is being seen as a major positive move. It affects petrol, LPG, and CNG vehicles with engine sizes under 1,200cc and length under 4,000 mm, and diesel vehicles under 1,500cc and 4,000 mm. Two-wheelers like motorcycles under 350cc will also now attract 18 percent GST, down from the current 28 percent.

Experts believe the decision will benefit first-time buyers and middle-class families, especially during the upcoming festive season. According to Ajit Mishra of Religare Broking, the move is ‘timely and will inject fresh momentum’ into the auto sector. Industry players say this will not only boost sales but also investor confidence in automotive stocks.

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Business

Indian stock market opens higher, Nifty above 24,700

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Mumbai, Sep 5: The Indian benchmark indices opened higher on Friday, buoyed by transformative rate reductions announced by the GST Council across sectors as buying was seen in the auto, IT and PSU bank shares in the early trade.

At around 9.38 am, Sensex was trading 140.72 points or 0.17 per cent up at 80,858.73 while the Nifty added 52 point or 0.21 per cent at 24,786.30.

Nifty Bank was up 4.05 points or 0.01 per cent at 54,079.50 The Nifty Midcap 100 index was trading at 57,291.20 after adding 332.05 points or 0.58 per cent. Nifty Smallcap 100 index was at 17,704.70 after gaining 82.75 points or 0.47 per cent.

According to analysts, Nifty indicated an optimistic positive move, with anticipation of positive cues from the GST rate outcome, which would decide the further course of the market in the coming days.

“The index would need a decisive move past the important 50EMA level at the 24,800 zone, which can trigger a fresh further upward move along with the broader markets beginning to participate to support the benchmark indices,” said Vaishali Parekh, Vice President (Technical Research), PL Capital.

The 24,500 zone shall continue to remain as the important support zone for the index, she added.

Overall, the market is showing resilience within a consolidation range. With improving technical momentum and steady domestic inflows, the near-term bias remains positive, said experts.

“Traders should adopt a buy-on-dips strategy and focus on stock-specific opportunities in leadership sectors like banking, IT, and auto,” said Mandar Bhojane from Choice Broking.

Meanwhile, in the Sensex pack, M&M, Trent, Tata Motors, Asian Paints, Power Grid and Maruti Suzuki were the top gainers. Whereas, ITC, Hindustan Unilever Limited, Sun Pharma and HDFC Bank were the top losers.

In the Asian markets, Bangkok, Japan, Seoul, Hong Kong and China were trading in green.

In the last trading session, Dow Jones in the US closed at 45,621.29, up 350.06 points, or 0.77 per cent. The S&P 500 ended with a gain of 53.82 points, or 0.83 per cent, at 6,502.08 and the Nasdaq closed at 21,707.69, up 209.97 points, or 0.98 per cent.

On the institutional front, foreign institutional investors (FIIs) were net sellers as they sold equities worth Rs 106.34 crore on September 4, while domestic institutional investors (DIIs) purchased equities worth Rs 2,233.09 crore.

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