SENSEX @ 60000: The Role of Low Interest Rates

'Don’t try to predict the future, Prepare for it. Predicting rains doesn’t count, Building the ark does'

Warren Buffett wrote this in Berkshire’s Year 2001 Annual report, and he admitted that he had expected certain risks but he hadn’t acted to mitigate them

If we remember year 2001, it was one of the most euphoric equity markets globally led by Tech stocks. In India, Infosys and Wipro were traded at 200, 300 PE and Interestingly. It took 20 years for Wipro to reach the peak which it did in 2001.

In this context, now SENSEX is hovering around 60000 levels and whether we are in such a euphoric stage right now and everyone is trying to understand and trying to prepare in case of any major correction from here onwards.

While trying to find the answer for this puzzle, first let us understand what caused this massive rally in Indian equities for past 19 months.

Broadly, these three aspects drove the equities to the record high and let us try to understand how low interest rates impacted the market.

Low Interest Rates

Low interest rates are another 'major reason for current bull markets'.

1. In India, Interest rates have reduced by half from 8% repo rate in year 2015 to current 4% repo.
2. Majority of the global economies have zero interest rates or negative rates predominantly
3. Technically, low interest rate regime induces fresh CapEx cycles across globe. Low interest rates will reduce the higher interest outgo & will enable higher net profit/EPS, it will make balance sheets of corporates leaner in nature and will help the corporates to improve their return ratios i.e Return on Equity (ROE) as well as Return on Capital Employed (ROCE).
4. In India – We had similar lowest rate regime in 2004 and it led to one of the broader CapEx cycle and Real estate revival and subsequent massive bull markets till Jan, 2008. Currently, we are in a similar situation on low interest rate front.
5. Current low interest rate regime enabled many of Indian corporates to reduce their debt which was accumulated in previous decades and following are few of the data points.
   1. As per SBI research team’s report published in June 2021, India Inc. on aggregate levels (top 1000 listed companies in India) reduced their debt by ₹1.7 lakh Cr in FY21 and it is 20% of their total debt in FY20.
   2. On corporate front, Reliance industries cut its debt by ₹85000 Cr & Tata Steel by ₹31000 Cr approx.
   3. SAIL & JSPL both reduced their debt in FY21 by almost 30%
   4. Debt/equity ratio of BSE 500 companies excluding financials is now at 0.7 and historically, it is the bottom. In 2003-04 period, debt/equity ratio of BSE 500 ex financials were at similar levels and then the mega CapEx led growth happened in next 5-7 years.
   5. This kind of deleveraging by India Inc. has not been seen before.
6. During various con-calls, Corporates have indicated that they will do their upcoming CapEx through internal accruals.

Above all points denote the impact caused by low interest rates. The number of companies becoming debt free or net debt free is high right now and it is all due to low interest rate regime.

Now that we have seen another cause for current uptrends and now, let us understand the concerns around the sustainability of current levels of markets and further uptrend.

Bibliography

Global Liquidity, For Now, is Flooding Emerging Markets, THE EMERGING MARKETS INVESTOR | Cautious companies cut loans by ₹1.7 lakh crore amid Covid, THE TIMES OF INDIA