Why has JP Morgan downgraded Indian equities to “Underweight” rating?

J P Morgan joins the long list of global brokerages like Morgan Stanley, Credit Suisse First Boston, UBS and Goldman Sachs in downgrading Indian equities. IN fact, JP Morgan has also cut its full-year forecast for the MSCI Emerging Markets index. The argument is that geopolitical tensions could fuel inflation worries due to the negative impact that the war between Russia and Ukraine could have on the crude oil prices.

JP Morgan had a Neutral rating on Indian equities and now that stands downgraded to Underweight. It has mentioned a number of factors responsible for this decision including weaker rupee as well as its impact on growth; the cost effects of a spike in prices of commodities like oil, chemicals, minerals etc. JP Morgan has also pointed to the risk of sustained portfolio outflows, apart from the domestic monetary tightening cycle.

With the US inflation at 7.9%, the Fed has already started with its first rate hike in March 2022 and has promised 6 more rate hikes in each of the remaining Fed meetings in the year 2022. RBI is expected to follow suit. As a result, even the growth target for the Indian economy has been trimmed from 9.2% to 8.9%. In terms of target for the MSCI (EM) index, JP Morgan targets it to hit 1,300, a downside potential of nearly 15% from current levels.