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Below is quote on Market By Shibani Kurian, Senior EVP & Head- Equity Research, Kotak Mahindra Asset Management Company

“Emergence of a new COVID-19 variant- Omicron, inflation concerns and hawkish turn of global central bankers has led to an increase in volatility in equity markets worldwide including India. With inflation increasing in countries across the world, all eyes are on central bankers and the pace of liquidity normalisation adopted by them. India has started seeing new cases of Omicron but the real impact would be known over the next month or so as was seen in previous waves of COVID-19. The pace of vaccinations in India continued to improve steadily.

One of the key events during the week ended Dec17, 2021 was the US Federal reserve meeting. While the Fed maintained policy rates, they signalled an increase the pace of tapering from USD 15bn/month to USD 30bn/month. The projections for the path of Fed rate hikes has also moved  higher for next three years. The FOMC dot plot now shows three rate hikes now in 2022 as compared to one hike projected earlier. The Bank of England hiked interest rates from 0.10% to 0.25% while the ECB further cut its bond purchases.

While the US Federal Reserve signalled a faster pace of tapering, back home RBI delivered a fairly dovish monetary policy. RBI’s Monetary Policy Committee voted to keep all key policy rates on hold at the Monetary policy meeting and the policy stance remained unchanged as accommodative. There were no concrete signals of any timelines on a possible reverse repo rate hike or any explicit liquidity withdrawal measures. The RBI therefore remains cautious on growth even as it projects a relatively strong growth path in 1HFY23. Further, the inflation trajectory so far is largely in line with RBI’s estimates and at present, RBI expects that inflation would remain within RBI’s comfort band of 4% (+/-2%).

In terms of flows, FIIs have been net sellers in the Indian equity markets in the month of Dec -21 so far to the tune of USD 1Bn.  However, strong domestic inflows continued with a strong growth in the SIP (Systematic Investment Plan) in the month of Nov -21. Overall during the month of Dec-21 , DIIs have been net buyers of Indian equities to the tune of ~USD2.5Bn .

Demand during festive period in India was strong which saw some moderation post festive season in month of November and would be monitorable going ahead for markets. Urban re-opening should be key activity driver for Indian economy. We expect that even while the structural drivers of the Indian equity markets are intact over the medium to long term, in the near term given the current valuations (both absolute and relative), Indian equity markets could witness some degree of volatility.  Market direction would be largely determined by 1) any third wave of COVID from new variant 2) flows from domestic investor as well as FIIs 3) demand trend over next few months and 4) movement in input cost inflation. RBI’s monetary policy and Union budget (to be presented in February) would be some of the other key events to watch out for.”

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