cash: room for smaller interest rate hikes

India’s stock market stood out on Wednesday in a sea of ​​declines as markets braced for more aggressive interest rate hikes from the US Federal Reserve to stamp out stubborn inflation. Projections for the terminal U.S. policy rate are being revised higher as inflation refuses to moderate, driving up yields on Treasuries and the dollar and draining money from risky assets like stocks.

India’s outperformance can be largely broken down into three structural factors. First, the Indian economy is different from a decade ago with low corporate debt and a banking system de-bottlenecked with bad debts. Second, a booming Chinese economy is diverting the tide of foreign capital to other emerging economies. Third, there has been an increase in household savings in stocks due to the wealth effect.

These factors are fueled by market understanding that oil prices may have peaked. This allows India to make smaller interest rate hikes with a narrower spread between initial and terminal rates. Similarly, improved tax collection creates space for infrastructure spending that should boost private investment spending.

E-exports, beneficiaries of domestic manufacturing incentives and competitive tax rates, signal India’s place in a world in search of supply chain resilience. Finally, the fragmentation of global trade is unlikely to affect computer services as much as industrial production.

But all this does not separate the Indian stock market from the rest of the world. The gap between gilt yields and equity earnings signals a correction. Indian equity valuations are rising as the outlook for achieving the GDP growth target for the year dims. Structural factors can, at best, dampen volatility in the Indian stock market.

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