How Stock Market Traders Can Build Their Portfolio After RBI's Hawkish Policy? Find Out!

Indian markets gripped in the palms of bears on August 10, despite RBI voting to keep the repo rate unchanged at 6.5% for the third consecutive monetary policy in FY24 so far. Both Sensex and Nifty ended lower by half a per cent. It was not the status quo in key rates or monetary policy stance that dampened sentiments, but instead the biggest elephant in the room, inflation which the central bank expects to rise in July and August 2023. Hence, RBI raised its FY24 inflation target, pushing the rate cut option to the next fiscal and bringing back the rate hike cards on the table for later in FY24. Now, raised inflation targets, key repo rates and other many developments that RBI announced, will have a specific impact across sectors. And hence, it is important, to understand where to invest and build your portfolio on markets.

On Thursday, a six-member MPC chaired by RBI governor Shaktikanta Das unanimously voted to keep the repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5%. Accordingly, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

However, RBI raised the inflation target to 5.4% for FY24 from an earlier 5.1%. Also, GDP growth is projected at 6.5% for the financial year.

Some of the key developments that RBI announced are --- 10% incremental cash reserve ratio (CRR) for banks from August 12 to manage liquidity overhang ahead of the festive season; greater transparency in the interest rate of Equated Monthly Instalments (EMI), by proposing that borrowers should have the option to shift from floating to fixed interest rates; increasing transactions limits for small value digital payments to Rs 500 from earlier Rs 200 in offline mode including for National Common Mobility Card (NCMC) and UPI Lite; review of Regulatory Framework for NBFC - Infrastructure Debt Funds (IDF-NBFCs); and consolidation and harmonisation of instructions for Supervisory data submission among others.

Sensex settled at 65,688.18, down by 307.63 points or 0.47%, while Nifty 50 finished at 19,543.10, lower by 89.45 points or 0.46% on August 10.

It needs to be noted that sectors do have a direct impact on RBI's policy. For instance, banking and NBFC sectors will see immediate impact from revisions in repo rates in their loan books and deposits, however, the quantum of impact will vary. Meanwhile, the credit-sensitive sectors are auto and real estate, consumer durables, agriculture, FMCG, and others are sensitive to inflations and so on.

Here's what experts say about building your portfolio after RBI's latest policy:

Sonam Srivastava, Founder & Fund Manager at Wright Research:

The decision to introduce an incremental CRR of 10% is a prudent move to manage the surplus liquidity in the banking system, highlighting RBI's commitment to ensuring stability. While the unchanged GDP growth forecast paints a confident picture for the economy, the raised CPI inflation forecasts for the coming quarters signify headwinds and the need for watchfulness. The MPC's stance on 'withdrawal of accommodation' aligns with its resolution to steer inflation towards its 4% target, balancing growth with stability.

The banking sector, in particular, might face short-term pressures due to the incremental CRR announcement, as it implies temporary constraints on deployable funds. However, the assurance of adequate liquidity should allay significant concerns.

With inflation forecasts being revised upwards, sectors like FMCG and agri-businesses might witness volatility based on the implications for consumer demand and pricing. The unchanged repo rate and other key rates, combined with clear communication from the RBI about their stance, will likely provide some stability. However, sectors linked closely to consumer spending might be on watch due to concerns about inflationary pressures impacting demand. Investors would be wise to remain vigilant and diversify their portfolios, focusing on sectors and companies with strong fundamentals and resilience to inflationary pressures.

Anil Rego, Founder & Fund Manager at Right Horizons

Retail inflation has accelerated for the first time in five months hovering above the RBI's target of 4% but below the upper band and is expected to be higher for the quarter. Wholesale inflation continues to deflate and registers the steepest fall since October 2015. Crude price recovered from lows and is expected to remain range-bound with concerns over a sluggish recovery in China's economy and fuel demand. The rates at 6.5 per cent are comfortable and one more hike is expected during the year without a material impact on growth and the expectation of a rate cut in 2024 remains a positive sign.

Markets have touched new highs, especially with earnings for the first quarter coming healthy supporting the trajectory. Investors are bullish as they are favouring rate cuts in 2024 which will unanimously boost the equity markets. The banking sector is the most sensitive to changes in rate cycles and has been a major reason for incremental earnings in FY23 benefitting from the hikes and credit growth being robust and persistent. Prolonged rate cuts will eventually lead to narrowing NIM but we expect rate cuts to begin in the last quarter and hence the trend in the banking sector is likely to continue in FY24. NBFCs will be best positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand.

Palka Arora Chopra, Director, Master Capital Services:

The decision of incremental CRR of 10% for banks is to absorb the excess liquidity from the system following the withdrawal of Rs 2000 currency notes. We expect it will not impact majorly to the banks in the longer tenure. The banking sector will continue to remain resilient on the back of strong asset quality, healthy credit growth and well capitalisation.

Rajesh Sharma, Managing Director, Capri Global Capital:

With the base effect stabilizing, non-banking financial companies (NBFCs) are expected to see growth in loan segments. This is a positive step with a long-term view of promoting the growth of the MSME segment and ensuring a greater access to formal credit at stable rates.

Sandeep Bagla, CEO Trust Mutual Funds

It is a cautious wait and watch policy, with macros having turned negative since last announcement in June. Oil prices, food prices have all gone up. Inflation expectations have gone up as well. RBI has imposed additional cash reserve requirement on incremental bank deposits. In July CPI headline reading will go up to close to 6.50%. Next few months would be a good opportunity to add duration to the portfolio with a 12 month investment horizon. It would be difficult for risky assets to perform in face of the headwinds caused by tight monetary and financial conditions.

Divam Sharma, Founder & Fund Manager at Green Portfolio PMS

We have seen a dream run over the last 5 months post RBI holding rate hikes. We are seeing a continuity of the stance of withdrawal of accommodation, focus on growth and being vigilant of global macro developments.

However, recent developments around markets factoring in the positives on RBI holding rate hikes, recent developments around enhanced macro uncertainties, rise in food inflation and crude price and uncertainties around growth across developed and emerging nations can create short-term volatility in the markets.

India is comparatively isolated from the rest of the world in terms of economic factors and the long-term prospects look promising while such headwinds can impact the markets over the short term. Stagger your allocation for the next 2-3 months and don't go aggressive on the markets at the moment.

RBI is an inflation trajectory central bank and its policy decisions will revolve around the movement of the consumer price index (CPI). Because of stubbornly high inflation, RBI had hiked the repo rate by 250 bps from May 2022 to February 2023.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns. in advises users to consult with certified experts before making any investment decision.