RBI's pro-growth policy brings cheer to D-Street, experts warn of bubble

Helped by pent-up demand and inventory push ahead of the festive season, earnings growth in September quarter is anticipated to be better than June's performance

After brushing aside five consecutive monetary policy committee (MPC) announcements, Friday’s policy stoked some positive sentiments for the market. The BSE Sensex rose by over 325 points, helping the benchmark index sustain the key physiological mark of 40,000 points, which it scaled on Thursday after a gap of seven months.

What many seemed to like about the policy is the thrust on growth, which was emphasised many times by the Reserve Bank of India (RBI) governor in his speech.

“Until now, the narrative has been all about controlling inflation. On Friday, the MPC’s approach changed to becoming pro-growth alongside curbing inflation, which is appreciated in such times,” says Pankaj Pandey, head of research at ICICI Securities.

Segments such as real estate, especially affordable housing, and loans to micro, small and medium enterprises (MSMEs) receiving incremental lending thrust by way of adjusting the risk weights and loan-to-value (LTV) and also increasing attractiveness of co-origination of loans for banks and non-banking housing finance companies, are seen as some measures that could spur demand in a few critical human-capital intensive segments. “Along with the structurally positive commentary from technology and pharmaceutical companies, it could lift overall earnings growth,” Pandey adds.

In addition, Dhananjay Sinha, head of strategy and chief economist, IDFC Securities, feels the larger takeaway is MPC’s reassurance that RBI will remain accommodative for as long as it takes to revive the economy. 

This stance, many say, will provide lasting comfort to the market. “It means that liquidity will be reasonable, which is an important assurance to give,” says Sinha.

With the repo rate at a rock bottom four per cent, not many were expecting a cut. Rusmik Oza, head of fundamental research, Kotak Securities, says the MPC has indeed done well by not further reducing rates. “Injecting liquidity through open market operations (OMOs), including purchase of state bonds, provides more monetary support than a rate cut,” he explains.

While these efforts lifted Street sentiment on Friday, Sinha says the risk of a market bubble remains. 

Helped by pent-up demand and inventory push ahead of the festive season, earnings growth in the September quarter is anticipated to be better than in June. But, sustenance of the trend is vital for justifying market valuations.

At 25x one-year forward earnings, experts say the Sensex is far beyond the comfort zone. “If the festive season doesn’t turn out as anticipated, justifying these valuations will become difficult,” warns Oza. He believes a strong case for time correction is in the works. While the MPC has set the stage for India Inc, meeting expectations is the challenge.