Reserve Bank of India (RBI) Governor Shaktikanta Das announced a hike of 25 basis points (bps) in the repo rate to 6.50 percent on Wednesday after the three-day Monetary Policy Committee (MPC) meeting concluded.
The MPC of the central bank decided by a majority of four out of six members to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target range and there is no harm to the economic growth of the country.
The governor's commentary on growth and inflation was optimistic. The RBI projected real GDP growth for 2023-24 at 6.4 percent while CPI inflation is projected at 5.3 percent for the same period.
The market looked happy with the policy decision which was in line with expectations.
However, market participants may be slightly concerned over the fact that the central bank did not give any signal on the pause of rate hikes.
It is worth noting that the RBI still believes inflation could remain above the 5 percent range for the next year. There could be upward revisions in inflation prints in case of a poor monsoon next year or a surprise jump in crude oil prices.
RBI understands that the country's economic growth is on a firm footing, so it wants to remain focused on its primary job - keeping inflation under check.
Besides, it wants to keep enough space with it to cut rates in future when a need emerges.
Despite no clear signal on pause in rate hikes, the market is not visibly disappointed. Sensex and Nifty traded over half a percent higher in afternoon trade.
Focus now has shifted to earnings and macroeconomic developments. Should we change our investment strategy now?
What should be your investment strategy?
A pause in rate hikes may be away but the market has enough opportunities in sectors that have started witnessing the emergence of value.
As growth remains in focus, infra-sector stocks look attractive for the long term. Also, investors can increase exposure to the defensive sectors, such as IT, pharma and FMCG.
Vinod Nair, Head of Research at Geojit Financial Services, pointed out that in a rising and high interest rate cycle, investors need to have a cautious approach because growth and valuations will tend towards becoming modest.
"India's GDP growth is expected to slow slightly in FY24, while its valuation remains higher than that of other emerging markets. Hence, the investors need to shun growth stocks and buy into defensives like FMCG, IT, pharma, and telecom," he said.
"Adopt value buying as a strategy. Sector-wise, infra, capital goods, and manufacturing look good owing to stable growth opportunities and moderation in valuations. Small and midcap stocks are also appealing on a long-term basis due to a drop in valuation near to its long-term averages," said Nair.
Manish Chowdhury, Head of Research at Stoxbox, is of the view that with a pause in rate hikes still looking far away due to continued high inflation and weak global macros, it would be prudent for investors to stay away from highly leveraged companies going forward.
Chowdhury said these companies would be the first ones to face the heat in a rising interest rate scenario along with some moderation in economic growth.
"Market participants should prefer defensives in this market, with a close eye on the quality of the business," said Chowdhury.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.