Do you think there will be a rate cut as early as September as the markets have been expecting for a long time?
Ajay Bagga: The market got it wrong from last September onwards and even in January, most of the big wire houses were forecasting anything from four to six rate cuts in the year and we did not see that happening. Right now, if you look at the Fed Fund’s futures, there is nearer to 89% chance of a rate cut in September and a second rate cut in December.
Three rate cuts are also projected with a 40-45% probability. So, it is a reaction by the market. There will be one more data set for the Fed before they meet and they will probably have the August data as well, so it might be two data sets before the 18th September meeting. So, let us wait and watch. They have been quite clear in saying that the whole thing is meeting to meeting data-driven.
The big difference yesterday on the back of which the markets rallied again and the S&P 500 made a seventh successive all-time high, was the Senate testimony of Fed chair Jerome Powell. He said they would not wait for 2% inflation to cut rates. So, the shift was from waiting for a level to waiting for a trend. And then we have got the trend today. The three-month annualised number is coming to 2.1% today. Again, we were disappointed by the January-March data. That is looking like an anomaly today based on the last two months’ data. It is giving more leeway to the markets.
But what will happen? One, there will be a sectoral rotation away from the magnificent seven, from the growth stocks today. We are seeing the midcaps, smallcaps going up nearly 3%. The Russell 2000 index is up 3%.
From the point of view of Indian markets, is there space for more risk appetite to be sparked in the markets? What do you project and predict for the Indian markets?
Ajay Bagga: I think on the monetary side, it will open some space for RBI to cut. Once the Fed starts cutting, they will follow because you will not risk the rupee. The good news is with the JPM bond index inclusion, we have got about Rs 85,000 crore and are expecting about Rs 2 lakh crore over the next few months. So, the RBI has a good cushion to protect the rupee based on the bond inclusion. But you can expect a rate cut by December by the RBI provided the Fed cuts in September or we go to February. Second, with the Budget out of the way by the end of this month, we will know the fiscal policy and the fiscal space. RBI’s hands will be strong. As far as the Indian markets go, some sectors like railways, defence are looking quite overvalued. We are seeing some amount of profit-taking happening there, but there will be a sector rotation coming by. Right now, banks are not doing too well. They have been again out of favour for the last couple of weeks. But as the Budget gets sorted out, we will see a rotation back into banks, into utilities, those should be the leaders of the next rally. And then IT comes back at some point, the Indian IT is sitting in the middle of the enablers, the semiconductor ones.