Ajay Bagga explains how FII inflows and economic recovery can boost market growth

“We were in a correction in a bull market. From a fundamental perspective, some things have changed. First, this week we saw very strong inflows coming back from FPIs, which is a positive sign. Second, the key takeaway from the RBI governor’s policy statement on Friday was that he sees the economy bottoming out in Q2 and leading indicators are now pointing to a possible recovery in the second half of the year,” says Ajay, an independent market expert. Bagga. Edited excerpts

ET now: Do you think the markets have really bottomed out? With the rally we saw last week, do you believe the corrective phase is over, and we’ve bottomed out? Are we now entering a bull run, where all we saw earlier was a correction in a broader bull market?

Ajay Bagga: We were in a bull market correction. From a fundamental perspective, some things have changed. First, this week we saw very strong inflows coming back from FPIs, which is a positive sign. Second, the key point of the RBI governor’s policy statement on Friday was that he sees the economy as bottoming out in Q2 and leading indicators now point to a possible recovery in the second half of the year.

It is crucial for the stock market to interpret RBI’s policy. If the economy has indeed bottomed out, as in November’s brisk PMIs—56+ in manufacturing and 58+ in services—India is doing relatively well economically.

While we hear headlines about slow growth, and some have called India stagflationary—especially for those who have not seen an actual stagflation period—it is not. India’s economy is growing at a modest growth of over 10%, which means it is far from stagnating. If you look beyond the headlines, I think the economy bottoming out is a crucial factor, and the market has probably bottomed out, and now we are on the upswing in India’s long-term structural bull market.

ET now: Looking ahead to recent monetary policy announcements – Do you believe the reduction in the Cash Reserve Ratio (CRR) is sufficient to ensure sustained growth while keeping inflation under control? And how does this connect to the global environment, particularly the geopolitical pressures that are affecting the economy? What are your thoughts on how the CRR reduction might impact us going forward?

Ajay Bagga: The CRR reduction is very welcome as it injects immediate liquidity into the system over the next 25 days. This will help keep interest rates low, which is beneficial as we head into a busy season for credit markets. It is good that liquidity will be available. Additionally, banks that were earlier earning zero percent on CRR can now buy government bonds or lend this money by improving their NIM (Net Interest Margin). CRR essentially takes money out of the banking system, so this returns to normal as it was 4% before COVID, and is now back to that level.

However, in terms of broader policy, I believe the RBI missed a step today. However, they have been prudent in the past, especially during Covid, when they took targeted measures like Mudra loans and other subsidized liquidity measures. So, they may be looking at something that is not the market. The only issue is that even when they start cutting rates, it takes 9 to 12 months for those cuts to flow through the economy. So, the question remains: Have we missed the window by keeping rates steady for the 11th time in a row? Personally, I think we are well prepared for a rate cut. Counter-cyclical measures are needed, but the government has not introduced any fiscal measures yet. Therefore, monetary policy has had to do most of the heavy lifting. We stopped at CRR cut only. I think the rate cut would have helped the economy more. But regardless, with increased government spending and the upcoming budget, we still have many opportunities. I expect a pre-budget rally in the markets, and the next 60 days are going to be very exciting.

ET now: While you might have expected a rate cut as part of monetary policy, a possible counter-cyclical measure to help the markets, there is another factor that could be helping the market right now: the return of FII flows. FIIs, who were net sellers in the first half of October and November, have now become net buyers. In fact, the data shows that they have purchased around 13,765 crore so far. If this trend continues, could this be a big catalyst for a market rally going forward?

Ajay Bagga: Yes, definitely, that would be a big factor. Domestic investors were doing most of the heavy lifting, and now with FIIs coming back, it’s like a double-barrel effect. This will definitely help. One of the main reasons behind the outflow of FIIs could be the change in SEBI rules regarding which funds can be invested in and the need to identify the ultimate beneficiaries of these funds. This may have caused some hot money to leave the market, and now real money is flowing in. But only time will tell. We expected FIIs to return by mid-January on account of fresh allocations, but these days, as markets continue to be online, the traditional January effect and Santa Claus rally have been mitigated by arbitrage opportunities. So, it is likely that FIIs are now entering in anticipation of the January impact, and we may be seeing an early Christmas rally in the Indian markets.