Investors stampeded into Indian shares driving benchmark indices to all-time highs in the week to Friday after a sharp drop in inflation bolstered expectations for a reduction in borrowing costs. Brokerages expect some consolidation, especially with the relative strength index indicating an overbought market, but cash-rich domestic funds and quarterly earnings should underpin stocks.

Retail inflation, the key factor guiding monetary policy, came in at 1.54 per cent in June, the slowest since the government began releasing consumer price data in January 2012. The reading was lower than what economists had projected, and off May’s 2.18 per cent. It also dropped below the central bank’s downwardly revised 2.0-3.5 per cent range for the first half of 2017-18, and 3.5-4.5 per cent in the second half.

The data is bound to pile pressure on the Reserve Bank of India (RBI) to cut interest rates when its Monetary Policy Committee (MPC) meets on August 2.

Radhika Rao, chief India economist at Singapore-based DBS, believes that the country faces deflation, particularly in food items. “We expect the RBI to cut rates in August. If they are convinced that disinflation is here to stay, there is a possibility of some more easing,” she told the Economic Times newspaper.

Paradigm shift

Separately, the Index of Industrial Production (IIP) grew just 1.7 per cent in the 12 months to May, below expectations of around 2 per cent rise and down from 2.8 per cent expansion in April, underlining sluggish manufacturing activity ahead of a new goods and services tax that was launched on July 1.

Arvind Subramanian, the government’s chief economic adviser and an ardent spokesman for cutting interest rates, pounced on the inflation and industrial output data to buttress his argument for easier monetary policy. He said there has been a “paradigm shift” in inflation, which has been missed by people who forecast the number.

“This low number and what it implies about underlying price pressures — as well as the latest IIP data just released — is something that, I am sure, policymakers will reflect upon very, very, carefully,” he tweeted.

Consensus among economists at private-sector banks and brokerages is for a 25 basis points reduction in the repo rate to 6 per cent. At the last MPC meeting in June the rate was kept unchanged, much to chagrin of mandarins in New Delhi who pitched for lowering borrowing costs to support economic growth. Minutes of the meeting released showed one of the six members in the MPC had pushed for a 50 basis points reduction in the repo rate.

A cut in interest rates could boost consumer spending as well as reduce the financial burden on companies. It could also revive investment, help create more jobs and accelerate economic expansion. Fund managers are betting lower rates will provide an added impetus to corporate earnings, which are widely expected to pick up pace over the coming months.

Fund flow, record indices

The top-30 Sensex, which is closely tracked by fund managers, shot to an all-time high of 32,109.75 on Friday, a day after breaching 32,000 for the first time ever. After a quick bout of profit-taking, the benchmark closed at 32,020.75, climbing 2.1 per cent over the week, the biggest weekly gain since mid-March.

The 50-share Nifty, which is mimicked by portfolio managers, closed up 2.3 per cent over the week at 9,886.35 after hitting a record 9,913.30.

Indian markets — the Sensex is up 20.3 per cent since the start of January, and the Nifty is up 20.8 per cent — have provided the best returns this year to investors among leading world bourses. The bullish rally has swelled the total market value of Indian shares to more than $2 trillion, making the market the world’s ninth largest.

Brokerages and fund managers say momentum favours further gains, specifically the rising inflow of household savings into equity funds. The spate of record gains in share prices is luring more people into the stock market, while falling interest rates diminish the attraction of term deposits. Other traditional investment avenues such as property and gold are playing second fiddle.

Data shows domestic funds bought shares worth more than $5 billion since April 1, more than double the inflow from foreign institutional investors who had for long dominated the Indian markets.

Earnings blues

Infosys Ltd, India’s second-biggest software services company that earns about 90 per cent of its revenue from exports, reported a better-than-expected performance in the June quarter, and maintained its full-year growth guidance, indicating confidence in its ability to ride out protectionist tendencies in its main US market.

“I am encouraged by the uptick in revenue per employee for six quarters in a row, and the strong momentum in our new high growth services and software, as we accelerate our focus on innovation-led growth,” CEO Vishal Sikka said.

Bigger rival Tata Consultancy Services posted results that were below market expectations, but the company said it was optimistic about client spending on technology. TCS is seeing a strong pipeline for new deals in the key North American market, especially from smaller customers, Chief Executive Rajesh Gopinathan told a news conference.

Earnings in the coming week include from Reliance Industries Ltd and Wipro Ltd, Bajaj Auto, Kotak Mahindra Bank and RBL Bank on Thursday. Wipro, the country’s No. 3 software services company, will also consider a share buy-back.

Other big results are from ACC and Jubilant FoodWorks Ltd on Monday, UltraCement on Tuesday, Havells on Wednesday, Ashok Leyland on Friday and Avenue Supermarts Ltd, which runs D-Mart retail chain, on Saturday.

The author is a journalist based in India.