2024 started with great amounts of volatility. First market touched all the time, and then we experienced equally sharp corrections. Overall, Sensex for the month closed in the red. However, investor’s portfolios are not seeing signs of red as the undercurrent is very strong. One must determine how long the undercurrent will remain strong, as many counters are running ahead of the fundamentals. That does call for caution while selecting companies. Investors should apply abundant precautions while selecting companies, as one should not buy companies at the top of the cycle. More on that later.

The market awaited two major events: the FOMC meeting on 31 January and the interim Budget on 1^st Feb. The market expected the Budget to be populist, as elections are due.

Let us understand each event.

Budget

The Finance Minister did not tinker with direct or indirect taxes but maintained a glide path on the fiscal deficit. India’s fiscal deficit for the current year was revised downward from 5.9 per cent to 5.8 per cent. For the next financial year, the same is expected to move to 5.1 per cent, and for FY2026, the government aims to further reduce to 4.5 per cent. What is also heartening is that government net borrowings are expected to be lower in the next year compared to the current year. The Budget aligned with the government’s agenda to make India a developed economy by 2047. The government focuses on infrastructure, railways, Farmers, housing, green energy and rural development. This is where we can expect more allocations to happen in the coming years. The Budget presented does give an impression that the BJP is confident of forming the next government at the centre. The prospects of BJP winning the election have gone up post-assembly elections. At the same time, other events unfolded, like Mamata Banerjee likely to fight alone in the West Bengal and AAP in Punjab. At the same time, Nitish Kumar broke the alliance with the JDU and Congress and formed a new government with the help of the BJP. Ram mandir event has further boosted the chances of the BJP winning the election. Hence, the market has assumed that the BJP is winning the election, keeping sentiments high. The interim Budget has no major (positive or negative) impact on the market sentiments. Hence, the market would move based on global events, the geo-political situation and India Inc. earnings.

Will the Fed cut the rate in March?

No one was expecting a rate cut from the Fed in January, but there was a strong opinion that one should expect a rate cut in March and Powell would give a hint in the post-conference on 31^st Jan. But the way the economy is showing strength and the press conference from Jerome Powell suggest we all need to wait longer for rate cuts. Right now, the probability of rate cuts in March is only 36.5 per cent compared to last month’s 69.6 per cent. At the beginning of the year, we predicted that the first rate could happen at the June FOMC meeting. We see no reason to change our opinion on the same. But RBI will announce its monetary policy on 8 February, giving some idea on the next interest rate cut. Our in-house view is that RBI can cut interest rates before the general election. We also expect a cut in the prices of Diesel and Petrol before the general election that could help to push down inflation in the economy. This can help RBI to go ahead with the rate cut.

FIIs Selling

FIIs have turned heavy sellers in the Indian equity market in the second half of January. They were net buyers in the first fifteen days of January, but they sold more than Rs 27000 crore in the second half. Even last year, January FIIs sold heavily, but overall, they were net positive for the whole year. Many investors need clarification about FIIs selling. Their question is- If the Indian economy is likely the fastest growing economy, why FIIS are selling? We sense that they are selling because they made good gains in 2023 and wish to lock in some of the profits. The way Bank Nifty has fallen gives us the impression that FIIs seem to have sold heavily in the bank’s nifty stocks. In 2024 FIIs investment would be moderate. We don’t expect the same kind of investment we saw in 2023.

Few concerns the market will have to navigate.

The valuation of the market has gone into the expensive zone. Somewhere, investors will assess that it is worth paying a higher premium in anticipation of future growth. India’s GDP by March 2024 would be Rs 300 crore, but the market cap is Rs 380 crore. That gives a market cap to GDP ratio of 127 per cent! India’s GDP by March 2025 would be Rs 330 crore. That means one year advance market cap GDP ratio is 115 per cent. The ratio does call for some amount of caution. While we are not advising taking cash calls, we are suggesting to book profits where companies have run ahead of the fundamentals. At the same time, fresh money one can invest in a staggered manner rather than putting in one go.

Heat waves are another concern. As per one report, wheat-producing states are likely to see warmer weather that could impact wheat production. When El Nino impact will subside is crucial for the Indian economy as another year of deficit monsoon may not augur well. As per the National Oceanic and Atmospheric Administration (NOAA), El Niño is expected to continue till May 2024 and transition to La Niña around July-September 2024. India’s Southwest monsoon starts in June. Its critical that transition happens in July rather than September.

Before I sign off, let me reiterate that the Indian market may face some headwinds in the near term, but the medium- to long-term outlook remains extremely good. In April 2022, we predicted that Sensex could touch 1,25,000 by April 2027 and Nifty 37000. We see no reason to change the guidance. In case market dips use that as an opportunity to put more money.