Pocket gains after RBI rate hike: Focus on auto, bank, discretionary consumption sectors; IT good contra bet

By Sushant Bhansali

The Reserve Bank of India hiked the policy rate by 50bps, the fourth hike this year, taking the repo rate to 5.9%. While this was on expected lines (hence no major knee-jerk reaction from the markets), it is also starting to become a fairly difficult tightrope walk for the Indian central bank. One thing that you have to acknowledge is that RBI has been fairly proactive in terms of inflation management, quite unlike the US Fed & ECB. The India consumer price index at ~7% has not had a free run and the deviation from the long-term average has been in control. A 200 bps deviation is not something that anyone would be losing sleep over.

Given the 110bps difference between CPI and repo rate and the softening inflation trajectory, one would expect the rate hike to either pause or at least slow down. This also becomes pertinent in light of the dwindling system liquidity. However, that is unlikely to be the case. Thanks to the aggressive tightening by the US Fed, the dollar has been appreciating at an aggressive pace against all major global currencies, including the INR.

This means that India has been forced to defend their currency and the RBI has ended up spending ~US$80bn trying to defend the INR. Furthermore, for every 75bps rate hike that Fed does, we end up doing 50bps. This is all an endeavour to defend the currency at the 82-85 band. This also means that not only are your forex reserves taking a knock but also your current account deficit is going out of whack. The situation is now getting serious and soon enough you may see some measures coming in to control the situation.

Also read: Rupee falls to new record low, may hit 83 per dollar in coming sessions on elevated crude price, FII outflows

These pushes and pulls will ensure that the markets will remain volatile. One could continue to worry but essentially this is a golden opportunity to build a portfolio from a long-term perspective. Remember, the inherent strength of the Indian economy will ensure that we shall continue to remain one of the fastest growing markets in the world and by default one of the best-performing markets in the world. In the base case scenario, India will grow at a ~6% pace compared to the ~3% world rate, thereby incrementally contributing ~25% of the global growth.

Remember, domestic consumption is amazingly strong and taking a position in correct sectors at correct valuations will ensure that investors create wealth for themselves. Remember, the best companies are best bought in tough times. Autos, banks, domestic formulation companies and discretionary consumption are sectors that should do well. IT at this point can be a good contra bet if you have a 2-year holding view.

Invest now, but remember, invest only in quality and invest only in good & clean companies.  

(Sushant Bhansali, CEO, Ambit Asset Management. Views expressed are the author’s own.)