| |
Director & Head of Equities,
|
| |
| JP Morgan |
| |
| The status quo stance of the credit policy seems to have gone down very well with the equity market even though the bond market is possibly disappointed with the absence of a cut in policy rates. |
| |
| There has been a revision of expected GDP growth to a robust 6.5 to 7 per cent, while inflation rate is expected to be lower at 4 to 4.5 per cent, with a possible downward bias. |
| |
| The preference continues to be for a soft and flexible interest rates, while there is an acknowledgement that forex reserves are comfortable and consistent with the rate of growth and the size of risk-adjusted capital flows. |
| |
| There is also some concern expressed about consequences of continued abundance of liquidity and the need to rein in inflationary expectations. |
| |
| An environment of stable to lower interest rates against the backdrop of robust growth in the economy coupled with benign inflation was just the confirmation required for the stock market to march ahead on the bull path. |
| |
| No wonder the stock market chose this important day to pierce the 5,000-Sensex barrier, rather convincingly. |
| |
| On a fundamental basis the value of equities can change for two reasons - market participants change their view on future profits or they apply a different set of discount factors to the expected profits. |
| |
| Interest rates can influence both these parameters determining equity valuation. Over the last couple of years, Corporate India has substantially benefited from falling interest rates and therefore lower interest costs. |
| |
| While this is fairly obvious from the income statement of corporate India what is not obvious is the discount factor - incorporating both the risk-free interest rate and equity premium - which investors apply in determining fair value of stocks. |
| |
| Despite the steep fall in interest rates, investors seem to be lacking in conviction to apply a correspondingly lower discounting rate in equity valuation. |
| |
| The credit policy, by reiterating a soft interest rate regime, should be able to bring forth this conviction. |
| |
