The rally in Indian stocks that’s driven the benchmark index toward its record will falter as higher interest rates curb economic growth, according to Prudential International Investments Advisers LLC.
The S&P BSE Sensex (SENSEX) has rallied 16 percent from this year’s low on Aug. 21 to within 2 percent of its all-time closing high of 21,004.96, as the U.S. Federal Reserve’s decision to maintain stimulus spurred inflows by foreign investors. The Reserve Bank of India will increase the benchmark repurchase rate to 7.75 percent in its next review on Oct. 29, according to a Bloomberg survey of economists, after the monetary authority unexpectedly raised the rate to 7.5 percent last month to contain inflation.
“The only thing that’s supporting the markets is liquidity,” John Praveen, chief investment strategist at Prudential, which manages about $1 trillion in assets globally, said in an interview with Bloomberg TV India in Mumbai. He declined to give a forecast for next week’s central bank meeting.
The economy expanded 4.4 percent in the three months to June, the slowest pace in four years. Consumer prices rose 9.84 percent in September from a year earlier, compared with 9.52 percent in August. That’s the second highest in the Group of 20 major economies, according to data compiled by Bloomberg.
While the Sensex will probably reach his year-end target of 21,300, “going much beyond that will be difficult given that the underlying fundamentals are somewhat challenging, especially with weakness in gross domestic product growth and inflation being elevated,” Praveen said.
The Sensex dropped 0.2 percent to 20.725.43 yesterday, after briefly surpassing the all-time closing high. Overseas investors have bought a net $1.9 billion of local shares this month, adding to inflows of $2 billion in September, data from the market regulator show.
The rally has surprised India’s equity strategists, who abandoned predictions for a record high in the Sensex on concerns earnings growth will slow. The average estimate in a Bloomberg survey of 11 forecasters fell to 19,409 this month from 21,150 in July.
“This is a fairly schizophrenic market,” Anup Maheshwari, head of equities and corporate strategy at DSP BlackRock Investment Managers Pvt., which has $5 billion in Indian shares, told Bloomberg TV India. “Everyone tends to pretty much reach the same conclusions very quickly at the institutional level. That tends to create very sharp movements in the markets.”
The Sensex tumbled 7.8 percent this year through Aug. 21 as foreign investors pulled $3.7 billion from Indian shares in the three months through August on concern the Fed would reduce monetary stimulus. Outflows from Indian stocks and bonds, coupled with a record current account deficit, dragged the rupee to a record low of 68.8450 per dollar on Aug. 28. The currency has since rallied 12 percent.
The Sensex trades at 18.1 times reported earnings, 50 percent higher than the MSCI Emerging Markets Index, data compiled by Bloomberg show.
“At these levels you should keep some powder dry and keep some cash and if there’s a correction triggered either by domestic events or international events then that might be a good time to deploy that cash,” Praveen said. “The bias is towards tightening rather than easing.”
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