the economy is also a positive. Even by the parameters set by the RBI, the inflation outcomes have come to look more favourable. We believe that inflation growth may moderate even more as we approach the next financial year.
In this backdrop, it is becoming increasingly likely that the central banker may resort to a rate cut to boost up sagging capital formation. The debt market is already discounting a 25 bps rate cut in the next policy meet. We believe that, over the calendar year, we might see around 50-100 bps rate reversion in the upcoming cycle.
This is expected to provide a cushion for growth in the economy and revup the investment formation cycle on the supply side. Additionally, the reduced financing cost is expected to provide a demand fillip as more retail investors prepone their purchase decisions to avail of reduced borrowing costs. This might help the loan book of many lending institutions and may also help address the asset quality issues more effective. What is more, the increased valuation of their SLR/bond holdings may also augment their treasury income.
For the same reason, the retail demand in other rate sensitive sectors such as realty and automobiles too may get a boost. However, that may be dependent on the pass-through that a retail consumer may gain from the rate reversion.
However, the question that how these sectors playout in the equities market; is altogether different. For one, the FII-led liquidity flow continues to remain a key determinant for the market. To add to that, the valuation levels, the business prospects and the management efficacy too need to be assessed.
This therefore does not necessarily imply that the defensive sectors such as healthcare may underperform the market. However, the weightage for underlying fundamentals would become increasingly important from the investment point of view and therefore a case-to-case assessment may be needed.
Thus, if history is any indicator: were the economy to do well, high-beta sectors might outperform the larger market. But then, while the history may repeat itself, it is never the same.
The author is CEO, Kotak Mutual Fund