India’s marquee financials are raising capital. This new capital is fortifying weakening balance sheets. We don’t know the exact extent of damage to the health of financial books.

Inflation is rearing its head even in a shrinking economy. Our first instinct is to infer this inflation spike as an outcome of supply disruptions. As the economy returns to normalcy, inflation needs to be reined in. Otherwise,  the levers available at the hand of policymakers and businesses to neutralize inflation will simply be rendered inadequate. This impending risk is becoming imminently real. So, the existing market froth, the optimism in consumption themes, and the buoyancy in financials are clearly out of sync with emerging realities.

Even if the market is confident these near term disruptions will be neutralised effectively over three or four quarters, this is clearly an over-simplistic conclusion. The coming months can force a reset in market thinking. If this coincides with global volatility, we will need to revisit our basics.

Fortifying financials must help weather the lack of credit growth, the rising loan delinquencies, and high business valuations. These two issues must be watched closely in the coming months. The real concern is that these valuations factor all positives without taking any of the negatives.

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