Indian equities are likely to come under pressure on Friday amid negative global cues.

Gift Nifty slipped around 1 per cent on Thursday. Nifty futures at Gift City (8 pm IST) is hovering around 22,590 against Nifty futures at 22,812 on the NSE. Global stocks slid after US March inflation data came in hotter than expected, with a 3.5 per cent increase in consumer prices for the year to March. This has raised the probability of the US Federal Reserve maintaining a status quo in June, keeping interest rates higher for longer, and resorting to two rate cuts instead of three this year.

Fed officials are worried that progress on inflation has slowed, as the minutes of the last Fed meeting released on Wednesday showed. 

The ECB held rates steady on Thursday. Oil prices slid marginally after logging early gains as investors braced for a worsening of the West Asia crisis. Brent crude prices were ruling at $90 per barrel. The dollar index, which measures the greenback’s value against six major currencies, was ruling over 105 after climbing to its highest level since November.

Rate cut impact

“The timing and extent of future interest rate cuts will play a pivotal role in shaping market momentum for the rest of the year. Any deceleration in earnings growth needs to be closely monitored,” said Vinod Nair, Head of Research, Geojit Financial Services.

Earnings growth in India is showing signs of contraction, with EPS growth expected to moderate to 5-10 per cent in Q4 compared to the 25 per cent growth seen between April and December last year, said Nair.

The Sensex closed above the 75,000 mark for the first time on Wednesday, a fresh high. The market capitalisation of shares listed on the BSE hit ₹400-lakh crore earlier in the week.

Market valuation

Pundits believe the market is marginally overvalued, with the 12-month trailing P/E for the Nifty at 22.7x, a 2 per cent premium to its long-period average of 22.4x. India’s market capitalisation-to-GDP ratio, at 132 as of FY24, is much above its long-term average of about 80 per cent.

“Rich valuations and geopolitical tensions worldwide, with expectations of an imminent Iranian attack on Israel, do not augur well for the market,” said UR Bhat, director, Alphaniti Fintech.

Overseas investors investing in India through Mauritius may have to face greater scrutiny after the amendment to the double taxation avoidance agreement between the two countries. Investments will have to pass the principal purpose test for availing tax benefits.

“You may not see a massive selloff, but the sentiment may turn negative. Some investors could look at other jurisdictions and create structures to transfer their holdings over time,” said Bhat.

Over a longer horizon, however, robust economic growth, in-line corporate earnings, macroeconomic and political stability, and sustained domestic flows are likely to keep the market resilient despite rich valuations. Investors may prefer large caps over small and mid-cap shares. Small-cap mutual fund schemes saw outflows in March for the first time in 30 months.

Agri and rural stocks are expected to be in focus after Skymet forecast normal monsoon for India in 2024.

Nair is inclined towards domestically driven sectors such as FMCG, infrastructure, cement, and telecom due to their stable demand outlook for FY25 and the potential for reduced operational costs. Defensive sectors like IT and pharma, on the other hand, offer resilience over the medium to long term, owing to their stable margin projections, lower input costs, and potential gains from a stronger dollar.

The Indian equity market remained closed on Thursday on account of Eid al-Fitr.