Will higher interest rates and silent corporate profits weaken FY23?

Markets closed the 2021-2022 fiscal year on a strong note with the S&P BSE Sensex and Nifty 50 indices up 18 percent and 19 percent, respectively. After markets posted a double-digit return for the second consecutive fiscal year, analysts expect the next 12 months to remain turbulent with rising inflation and rising interest rates to the stock exchanges. Analysts believe that inflationary pressures are expected to cast a shadow over India’s earnings this fiscal year, despite the reopening of economic activity. Corporate profitability is still at stake as companies are reluctant to raise prices.

In light of this, many brokerages have lowered earnings expectations as companies expose themselves to increased margin pressure. Morgan Stanley lowered its earnings growth forecast by 8 percent for fiscal year 23. Meanwhile, Motilal Oswal also slashed the automakers’ earnings estimates due to higher fuel prices. Vinod Nair of Geojit Financial Services warned of margin pressures and muted consumer sentiment to lower the FY23 earnings roadmap. Moreover, with global central banks raising interest rates, India too will be walking a tightrope to control inflation and maintain permanent growth. The Reserve Bank of India will hold six monetary policy committee meetings in fiscal year 23, starting from April 6-8. Although analysts expect the central bank to delay rate hikes in the latter part of FY23, investors will be watching the RBI’s comment on inflation expectations. On the other hand, after the massive FY22 for the primary markets, FY23 will see more than fifty companies head to stock exchanges to raise funds, including the much-anticipated initial public offering. However, a section of the analysts expect stocks to remain a positive bet in fiscal year 23 as markets priced in the bad news. Manish Jain, fund manager at Ambit Asset Management, believes that strong rural demand and credit growth will drive the markets forward.

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