Daily Voice: Oil, bond yields to keep markets volatile, but recovery possible, says Samco MF CIO

As per the latest business developments, The external environment stays a headwind, but India’s domestic expansion drivers keep be relatively firm, believes Umeshkumar Mehta, CIO at Samco Mutual Fund.

While he anticipates volatility to stay elevated, Mehta does not necessarily see factors such as crude prices and bond yields preventing markets from recovering.

Ahead of the RBI’s October policy meeting scheduled for the week ahead, Mehta anticipates the central bank to maintain a wary approach. He sees a 50% chance of a 25-basis-point interest-rate gain, followed by close monitoring of incoming data.

“The RBI will not want to unnecessarily restrict an economy that keeps show reasonable expansion,” he stated in an interview with Moneycontrol.

Do you expect the inflationary impact of weather-related disruptions to persist?

Weather-related disruptions could keep food inflation elevated in the near term. That stated, we should not assume that the impact will be persistent. If weather conditions normalize and agricultural supplies improve, food inflation should moderate.

The key risk would be if the elevated food prices begin feeding into wages and services inflation. For now, I would view weather as a source of volatility rather than a sustained inflationary trend.

Considering overseas risks such as oil price marks and US bond yields, will it be difficult for the market to come out of the woods this year?

The external environment is certainly a headwind. Elevated crude prices will affect India's inflation, current account, and currency, while elevated US bond yields can keep global liquidity tight and could put pressure on emerging markets.

That stated, India's domestic expansion drivers stay relatively firm. I would as a result expect volatility to stay elevated, but not necessarily see these factors as preventing markets from recovering.

Do you expect the RBI to maintain the status quo or hike the repo rate at its October meeting?

The RBI's decision will depend primarily on the inflation-expansion balance. With inflationary pressures showing signs of broadening and external risks such as oil adding uncertainty, a 25-basis-point hike is a possibility.

At the same time, the RBI will not want to unnecessarily restrict an economy that keeps show reasonable expansion. My expectation would be for a wary approach, with the possibility of a 25-bps hike with a 50 percent chance, followed by close monitoring of incoming data.

Are the days of using agricultural output as a proxy for GROSS DOMESTIC PRODUCT expansion behind us?

Yes, to a large extent. Agriculture stays extremely important for rural incomes, food prices and consumption, but India's economy has become much more diversified. Services, manufacturing, construction, financial services and investment now play a much larger role in determining overall expansion.

Agricultural performance should as a result be viewed as one component of the expansion story rather than a proxy for GROSS DOMESTIC PRODUCT expansion as a whole.

Is this the time to stay overweight on domestic themes and underweight on international themes and sectors?

We maintain a constructive bias toward domestic themes, given India's structural expansion drivers and relatively firm domestic demand. That stated, I would be wary around making an outright domestic-versus-international call.

Global diversification stays important, particularly when valuations in some domestic segments are elevated. Within India, I would focus on businesses with firm balance sheets, earnings visibility, and sustainable cash flows plus price momentum.

Are you bullish on non-ferrous metals and the capital-market theme?

We stay constructive on both themes, but for different reasons. Non-ferrous metals should benefit from infrastructure, electrification and energy-transition demand, although they stay cyclical and sensitive to global expansion.

The capital-market theme has structural backing from rising financialisation of household savings and greater market participation. In both cases, that stated, valuations and the global economic cycle will be important.

With much of US expansion being fuelled by AI-related capex, is this a major risk?

It is certainly a risk worth monitoring. AI-related investment has become an important contributor to US expansion, and expectations around future earnings are high. The concern would arise if AI spending slows sharply or if the returns on these investments fail to justify current expectations.

That could affect technology valuations and, through global markets, sentiment more broadly. That stated, I would view this as a risk to monitor rather than a reason to dismiss the underlying AI opportunity.