Rampaging Indian shares, whose record-breaking run took them past a key milestone over the past week, should get a shot in the arm when the central bank will most likely reduce interest rates in the coming week, providing a spring board to accelerate growth.

The six-member Monetary Policy Committee (MPC), headed by the Reserve Bank of India (RBI) Governor Urjit Patel, is widely expected to vote on Wednesday for a 25 basis point cut in the repo rate to 6 per cent, after consumer price inflation dropped below the lower end of the central bank’s 2-4 per cent range. If it were to happen it would be the first reduction by the RBI since last October.

A few economists are betting the MPC may recommend a 50 basis point cut, taking cue from one member of the MPC who had argued for the same at the June review, when the majority stayed pat.

“A quarter point cut is a given,” said equity salesman Anmol Bhushan. “The market has been pricing in that. A bigger cut will be a bonus — it will be a staunchly bullish signal.”

The 50-share Nifty index, which is used as a benchmark by foreign and domestic portfolio managers, shot past 10,000 for the first time ever on Tuesday. It took 25 years for the marker to reach this milestone, but with economic expansion set to expand at a faster clip 20,000 could be mounted in less than five years, according to Vijay Kedia, managing director of Kedia Securities.

The Nifty climbed as high as 10,026.05 on Friday and closed at 10,014.50, making India one of the top performers among major bourses with gains of 22.3 per cent so far in 2017.

The top-30 Sensex soared to an all-time high of 32,672.66, and closed at 32,309.88 on profit-taking. The blue-chip index is up 21.3 per cent this year.

Consolidation on cards

Some pundits believe stocks may have risen too fast for their own comfort. Unbridled exuberance or greed could cause grief to investors, particularly when underlying weaknesses in the economy are papered over, they warn.

Manufacturing activity and economic expansion are facing headwinds because of the transition to a new national goods and services tax as well as continuing reluctance among private-sector companies to invest in expansion or new projects. Many companies are still struggling under bad calls they had made earlier and weighed down by accumulated debt.

Lower borrowing costs could help ease the pain and enable a quicker recovery. However, some analysts argue that throwing a lifeline at this point would in effect stall the concerted efforts by regulatory authorities to clean up the mess of inept and inefficient. A shakeout, it is said, would weed out the poor performers and enable a better disbursement of resources for productive purposes.

At the other end, many stocks are too richly priced. Shares that make up the Nifty-50, for instance, trade at more than 20 times 12-month forward earnings, compared with five-year average of less than 18 times. The 14-day relative strength index of both the benchmark indices is well above 70, indicating an overbought market.

In other words, the market needs to consolidate, enabling players to catch their breath. Early birds should take some profits off the table, cool prices and pave the way for new entrants. This would ensure a healthy development of the market, and lower the risks.

“There is a strong likelihood of the market following the adage: buy on expectation, sell on news,” said Bhushan, referring to the RBI review. “Brace for volatile trading.”

Foreign funds have bought Indian shares worth a net $8.8 billion, more than the total $6.3 billion in the previous two years. Big gains in stocks have accelerated the flow of individual savings to domestic funds, and they play a bigger role in determining market direction.

So, while the markets are ripe for a correction, the abundant liquidity in the system would ensure support is not far behind when opportunity beckons.

Right path

There is no doubt that India is on track to regain the tag as the fastest growing major economy in the world. The International Monetary Fund has forecast India’s GDP to expand 7.2 per cent in 2017-18 and 7.7 per cent in the following year. That would be higher than China’s 6.7 per cent and 6.4 per cent respectively for this year and the next.

A new poll of economists conducted by Reuters over the past week showed the more than $2 trillion Indian economy is likely to grow 7.3 per cent in 2017-18, up from 7.1 per cent in the previous year when an abrupt demonetisation drive last November took the wind out of the sails of the economy and growth slowed to 6.1 per cent in the March quarter.

Corporate earnings, one of the drivers behind the stocks rally, have been mixed but save a few exceptions there is consensus that companies are moving to a stronger footing.

Maruti Suzuki, India’s biggest car maker, reported a lower-than-expected 4.4 per cent rise in April-June profit, its weakest rise in earnings in five quarters, mainly due to an one-time provision to compensate dealers for the transition to the national goods and services tax.

Brokerages expect the company to bounce back quickly, helped by the ramp up of a new facility in Gujarat and heavy backlog of orders for three models. Securities house CLSA expects operating leverage benefit from higher volumes in the remainder of the financial year and improvement in margins. It raised its price target on the stock to Rs9,230 from Rs8,100, and maintained its “buy” rating.

Another brokerage Macquarie said Maruti was the “best play” on Indian auto growth, and strong demand for higher priced models was a sign of improving margins. It retained its “outperform” rating on the stock and raised its target to Rs8,250 from Rs7,500.

Shares in Maruti, with a market value of more than $35 billion, have been among the top performers this year, racing 43.2 per cent to Rs7,621.95 at Friday’s close, after hitting a peak of Rs7,679.

The writer is a journalist based in India.