Indian equities are not yet pricing in the possibility of a rate hike in 2026, according to Aditya Khemka, chief investment officer at InCred Asset Management. As reported by Business Standard, Khemka noted that while the markets have been sideways for a while, the Nifty 50 is still trading in line compared to its own historical valuation in terms of price/book value. He emphasized that a rate hike expectation should have taken the valuation below its historical average, as the earnings growth for the Nifty 50 has been below the historical average.
Indian government bonds extended losses on Friday, with the 10-year bond yield rising to a more than two-month high amid supply concerns and anticipation of Fed Chair Kevin Warsh's speech at Jackson Hole. As reported by The Hindu BusinessLine, India's benchmark 6.94% 2036 yield was at 6.9079% at 11:20 am IST, up nearly 2 basis points from Thursday's close and hovering at its intraday highest since June 18. New Delhi is selling ₹34,000 crore ($3.56 billion) of the benchmark note, which will raise its outstanding to ₹1.8 lakh crore. A sustained break of the key 6.90% level could open the way to 6.95% for the benchmark yield, according to private-bank traders.
Rising inflation remains the biggest near-term risk to markets, according to Khemka's analysis. As reported by Business Standard, he explained that if global supply disruptions continue and crude prices remain elevated, the WPI will continue to be high and eventually result in higher CPI as corporates pass on the increase in manufacturing cost to consumers. Higher consumer inflation would result in lower volume and earnings growth, and ultimately poor shareholder returns.
The Nifty is trading at a minor 4% discount to its historical price/book value multiple but with similar RoE vs history and slower earnings growth, according to Khemka's assessment reported by Business Standard. He noted that mid-caps have done significantly better than large and small-caps in terms of earnings growth and are trading at a significant premium to their historical valuations, offering a growth orientation but with low margin of safety in case earnings were to disappoint. Small-caps at the index level (top 250 small caps by market value) are at a slight 4% premium to historical averages with significant improvement in RoE vs history and low-teen-to-high-teen earnings growth, offering more margin of safety.
FPI buying trends have been encouraging with the return to positive flows to the Indian equity market, as reported by Business Standard. Khemka identified three factors that were limiting FII participation: rupee depreciation, no play on AI/ML, and higher relative valuations compared to other EMs. He noted that recent measures from the finance ministry on FCNR deposits and taxation on Gsecs have stemmed the rupee's fall against the USD, while the AI/ML trade seems to be maturing and not attracting incremental capital.
