Lodha To Kajaria: 50 Bps Rate Cut By RBI In H2CY24? Jefferies Gives BUY On These Rate-Sensitive Stocks

In the year 2024, apart from the outcomes of general elections, stock market investors are also closely observing a rate cut scenario from RBI. The chances of a rate cut are high this year because inflation has cooled off to a comfortable bearing, and the economic growth of the country is resilient. Leading global brokerage, Jefferies expects RBI to follow US Federal Reserve's rate cut movement and it is most likely to take place in the second half of 2024.

Jefferies is expecting a 50 bps rate cut from RBI in H2 of 2024. It has recommended buying in rate-sensitive stocks in sectors of real estate, NBFCs, and CAPEX.

In its India strategy for 2024 research report, Jefferies said, the delayed impact of rate hikes should be visible with the expected US GDP growth slowdown in CY24. Consensus expectations are of a 110bps slowdown in the GDP growth to 1.3%, Jefferies economist
expects a sharper deceleration.

Jefferies believes this shall pave the way for the fed rate cuts. Its consensus expects 150 bps rate cut by the fed during CY24.

A similar trend is expected from RBI. Jefferies added "We expect the RBI to follow suit with a lag and expect 50bps rate cut in India in 2HCY24. This should augur well for rate sensitives - property, NBFCs and capex plays."

It needs to be noted that its latest FOMC minutes for the December 2023 meeting which was released on January 3, 2024, revealed that Fed officials cited lower inflation risks while being convinced that inflation was coming under control. However, the officials expressed concerns related to the damage that 'overly restrictive' monetary policy could do to the economy ahead. Hence, these officials agreed that a lower target range for key interest rates by the end of 2024 would be appropriate.

In Jefferies' view, the Dec23 policy of the US Fed projected interest rate cuts of 75bps over 2024, with the Fed chair expressing comfort with inflation and as such returning to more normalized interest rates. The consensus, however, is pricing in ~150bps of rate cuts during CY24. Chris Woods ascribes three plausible explanations for the change of commentary by the Fed.

The first explanation is that the Fed is aware of data not yet published which has caused governors to become more concerned about
the economy. Second would be that the Fed chairman risked losing the support of the committee and, in the spirit of maintaining a collective consensus, decided to side more with the majority opinion. At last, the third explanation could be that Powell's change of language is driven by the presidential election cycle and the significant ongoing slump in Joe Biden's approval rating, as per Jefferies analysis.

That being said, RBI is also expected to follow the path of the Fed.

Jefferies said, "While India did not have a high inflation jump, unlike the Developed world, RBI rate hike was partly driven to support the INR as the US tightened. With the US expected to cut rates in 2024, and the inflation outlook benign, the RBI may consider rate cuts during the year."

Finally, Jefferies also said, "We expect timing for the same to be likely in 2H, as the impact of budget post-elections and monsoon forecasts get factored in by that time. Our favourite rate sensitive is the property sector with Lodha developers and GPL as our top picks. We also like other housing sector plays with Kajaria, Polycab, KEI."

Three of these rate-sensitive stocks that are recommended for buying are already multi-bagger. In a year, Microtech Developers aka Lodha shares have emerged as a multi-bagger with nearly 101% upside on BSE, while KEI Industries have zoomed by over 124% and Polycab India surged more than 106%. Meanwhile, Godrej Properties (GPL) shares gained over 83%, and that of Kajaria Ceramics have gained by 12%.

After an aggressive hike of 250 bps in FY23, RBI has kept the repo rate unchanged at 6.50% in nine months of FY24. The majority of experts are already eyeing a pause in the last bi-monthly monetary policy of the current financial year. An RBI monetary policy poll conducted by GoodReturns.In earlier also revealed that the majority of experts believe that a rate cut is likely to be warranted from Q2 of 2024 or in the second half of the year.

In the minutes of the December policy meeting, RBI's governor Shaktikanta Das said that the "softening of headline inflation to 4.9 per cent in October 2023 gives further credence to the fact that the heightened and generalised inflation pressures seen in the summer of 2022 are behind us."

He added, "This disinflation is underpinned by steady moderation in CPI core inflation, caused by easing of price momentum across core goods and services. Core inflation in October was the lowest since early 2020 and would show that our monetary policy actions are working."

However, despite easing in CPI, Das said the inflation outlook is expected to be clouded by volatile and uncertain food prices and intermittent weather shocks. Hence, he reiterated that MPC has to remain highly alert to any signs of generalisation of price impulses that may derail the ongoing process of disinflation. Accordingly, he said, RBI has to remain vigilant and ready to act effectively in its journey towards a 4% inflation target.

What are rate-sensitive stocks?

Rate-sensitive stocks are those which are influenced by the revisions in monetary policy rates. Generally, when policy rates are increased, it makes traders reluctant to pick equity shares as their future returns look less attractive compared to treasury yields that give much more competitive returns in such a scenario. And the case is vice versa when rates are cut. Banking, real estate, FMCG, NBFCs, hotels and travel are some of the sectors that are impacted by the movement of interest rates.

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.