The Reserve Bank of India (RBI) in its monetary policy meet on 02ndJune, 2015 has cut the repo rate by 25 basis points to 7.25% from 7.50%. Consequently, the reverse repo rate under the LAF stands adjusted to 6.25% and the marginal standing facility (MSF) rate was cut by 25 basis points to 8.25% as against 8.50%, while Cash Reserve Ration and Statuary Liquidity Ratio kept status quo at 4% and 21.5% respectively. The interest rate cut to spur growth and revive investment but the central bank has remained cautioned that Inflation is expected to rise to 6 per cent by January 2016 and they also cut their GDP target to 7.6% from earlier 7.8% for FY 16. A possible push back of U S interest rate hike by FED, still makes indicators of recovery and low investment and credit growth has led RBI to cut interest rates by 0.25bps. But going ahead we are expecting monsoon to remain normal, clearing of GST bill in Rajya Sabha during the monsoon session, possible clearing of Land Acquisition bill, further with the process of clearing of stuck infrastructure projects is going on and likely pick up in corporate earnings going ahead. We expect a further 25 bps rate cut or a CRR cut during the year.
Nifty had a non-stop rally from 6000 to 9000 over the last year on the promises of getting rid of policy paralysis, passing of key reforms and bringing back the India’s growth on the track given by the pro-growth government at the centre due to the strong mandate given by the people of India. After the non-stop rally over the last 12 months, the question arise in the mind of investor whether the Indian market cheap or not.
One of the key indicators considered by Warren Buffett is Mcap to GDP ratio. A ratio used to determine whether an overall market is undervalued or overvalued. The result of this calculation is the percentage of GDP that represents stock market value is as follows a ratio < 50 represent that market is significantly undervalued; Ratio between 50%-75% mostly Undervalued, Ratio between 75%-90% fairly valued and Ratio above 90% is overvalued.
India’s current Market cap to GDP stands at 87% which is at the highest level in last five years. India’s current Market cap to GDP ratio at 87% shows that the market is Fairly Valued. We believe that short term investors should remain cautious and for the long term investors it is good time for SIP.