Softening inflation in the US and in India boosted the stock markets. While retail inflation fell to a one-year low of 5.72% in December in India, industrial production was better than expected. That apart, with US inflation numbers falling in line with analyst expectations, the dollar index and 10 year bond yields have also softened. On Friday, the Nifty and Sensex gained 0.55% and 0.51%, respectively.

Vinod Nair, head, research, Geojit Financial Services, said easing inflation and encouraging Q3 numbers projected by the second set of IT majors are outweighing the concerns of the markets. Consumer price index (CPI) inflation in India and US cooled off, bolstering expectations of a less aggressive policy stance by the central banks. Falling treasury yield and dollar index are also raising investors’ sentiments.

 

Nifty closed at the highest levels in four sessions as IT stocks rose following encouraging results and the guidance from industry leaders. The positive start to the results season should also accrue benefits for the markets, said analysts. With a softer inflation print in India, the Reserve Bank of India may take a less hawkish stance. In addition, softening inflation should drive earnings of companies.

Given that the CPI print is lower than street estimates at 5.72%, and quarterly inflation data is lower than RBI’s projections of 6.6%, it bodes well for the economy, and allows the central bank to review its monetary policy stance, said Sushant Bhansali, chief executive of Ambit Asset Management. Given the recent cool-off in commodity prices, earnings are likely to be supported by margin expansion and markets outlook remains buoyant, he said. At the upcoming union budget, the covid situation in China and inflationary trend will be influencing factors, but concerns may continue over foreign portfolio investor selling Indian equites. FPIs were net sellers of ?2422.39 crore worth equities on Friday. They have so far sold ?11,507 crore worth of equities in January.

According to Nishit Master, portfolio manager, Axis Securities, FPI selling may be partly driven by shifting of allocation from India to other markets, especially since India has significantly outperformed other major markets in 2022, but the flow should soon reverse.

Master, believes that once this reallocation gets completed, FPIs will again start investing in India since India remains the fastest-growing major economy and in an environment where global growth is slowing down, an economy that is showcasing strong growth should attract capital.

Bhansali also says that India was amongst the best-performing markets in CY22, delivering positive returns for global investors. However, due to sharp out-performance, India’s valuation premium expanded to multi-year highs, leading to profit bookings by global investors. Bhansali believes that earnings will remain robust, and FII’s will come back into India chasing growth.

Further while the FII selling continues, the DIIs now have fundamental support coming from reduced CPI inflation and rising IIP numbers said analysts. The RBI can now afford to soften rate hikes and the emerging interest rate scenario is favorable for banks and NBFCs feel analysts, while the impressive Q3 results from IT majors will keep the IT segment resilient.

“With a better economic outlook for India as compared to other major economies, clarity emerging on recessionary fears, and interest rate peaking towards mid-2023, we see that the outlook for 2023 is trending towards high single-digit to low double-digit growth in Nifty and individual-focused quality multi cap portfolios to be growing in double digits" said Jaspreet Singh Arora CIO Research & Ranking.

Nevertheless, there are some words of caution too as core CPI in India remaining sticky at 6.3%. The China now opening up can lead to higher commodity and energy prices increasing chance of inflation trajectory not being as softening as seen in the last two months. This as per Master might leave the markets volatile, especially since markets will also try and pre-empt expectations from the Union Budget scheduled for 1st February 2023.