Mahesh Nandurkar of CLSA said global liquidity would continue to play a major role in market valuations and a rate hike by the Federal Reserve later this month was a risk. Foreign institutional investors have pumped in more than Rs 57,000 crore so far in Indian equities since March (especially after Union Budget). At 8,952 (September 8 closing), the Nifty is now almost close to February-March 2015 peak levels of about 8,900-9,000. Interestingly, the 12-month forward consensus Nifty EPS (earnings per share) then at 537 was about 2 percent above the current. So currently the Nifty PE (price-to-earnings) is 2 percent higher than the February-15 peak, he said. As the equity markets approach new highs, he said he felt nearly the entire PE rerating of the Nifty over the last six months can be explained by the fall in the Indian risk-free rate. Since February-end, India's 10-year government bond yields have come off by about 60 basis points; this alone can explain a 15-18 percent rerating, everything else remaining the same, according to him. On the flipside, Nandurkar said lower yields implied lower inflation and growth expectations in the long run. In the short run, however, a fall in the bond yields would have the capability to drive a further rerating of Indian equities. He said he felt a likely change in the 10-year benchmark security by the month-end may drive down the risk-free rate by a further 20-25bps, though only optically.
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