Nifty Jumped Tuesday On Hopes Of RBI Rate Cut, Lower USD And Lower Oil; PSU Banks

Nifty Jumped Tuesday On Hopes Of RBI Rate Cut, Lower USD And Lower Oil; PSU Banks

The Indian market (Nifty Future) closed around 11267.55 on Tuesday, surged almost +0.77% and it jumped 200 points to a session high of 11338 from the session low of 11138 on hopes of RBI rate cut, lower USD, lower oil and upbeat earnings from some PSU banks despite negative global cues due to lingering Trump trade war. PSU banks helped the market on hopes of RBI rate cut and some upbeat earnings. But techs dragged on lower USD and Trump trade war (protectionism policies; H1B visa issues).

Nifty slips from the session high in late trade on the forecast of below normal and an uneven monsoon this year by private weather forecast agency Skymet.

On mid-Tuesday, Nifty future was trading around 11165.00, edged down almost -0.15% on subdued global cues as China retaliates despite Trump’s warning. But the overall impact is quite limited as Trump is showing signs of conciliation rather than retaliation after Dow plunged over 700 points overnight. Trump said late Monday that he has a feeling that future trade talks with China are going to be successful. Nifty made an opening session low of 11138 on Tuesday on negative global cues.

On Tuesday, data shows that the Indian headline WPI edged down to 3.07% in April from prior 3.18%, right on the expectations of 3.07%. The core WPI dropped in April to 1.9% from prior 2.55%, lower than the expectations of 2.24%. The Indian WPI is equivalent to PPI and used as a GDP deflator. Lower WPI could be positive for GDP growth, although a gradual fall in core CPI could be also indicating a slowing economy. Lower core WPI may be also an indication of lower core CPI (inflation) in the coming days, dovish for RBI policy.

On Monday, data shows that the headline Indian CPI edged up to 2.92% in April, at 6-months high, from prior 2.86%, but lower than the expectations of 2.97% (y/y). The higher CPI was mainly because of higher food inflation and the headline CPI could again surge towards RBI target of 4.00% on account of high probable fuel price hike by a large extent soon after the election ends on 19th May (as retail fuel price hike was on hold for the last few months due to election/political populism despite Brent Crude oil jumped almost 13% since Feb’19). And food inflation is also on the higher side for the last few weeks and remains so, because monsoon this year may be much less than normal and erratic.

The Indian cores CPI dropped to 4.55% in April from prior 5.01%, and lower than the expectations of 4.60% (y/y), but still well above the RBI target of 4%, although RBI, under present governor Das do not consider core CPI in its monetary policy setting, unlike global practice. RBI only considers headline CPI as per its official mandate, although it’s often volatile due to food and fuel prices. The present core CPI at 4.55% may be the lowest in the present cycle (base) as headline CPI is already increased from the lower of 1.97% recorded in Feb’19.

In any way, as the headline CPI still well below RBI target of 4% and there is visible evidence of an economic slowdown (industrial production contracted -0.1% in March, the lowest growth since June’17), the market is expecting another rate cut by -0.25% by the RBI on 6th June to bring the repo rate to 5.75%. But the RBI may not cut further as their last meeting minutes revealed that MPC is quite hawkish about higher inflation and higher fiscal deficit prospect coupled with the fact that there will be no government pressure in June to cut rates as the election is over.

Further, there will be a question of rate cut transmissions by the banks below RBI repo rate of 6%, whereas banks are not transmitting the full benefit of 0.50% rate cuts in the last few months under the new governor Das.

Also, in India, interest on small savings instruments, PPF are very high compared to the DM or even other EMs including China. Lack of proper social security and higher borrowing costs (bond yields around +7.50%) are one of the primary reasons for the higher interest rate on small savings instruments and being politically sensitive, no government will try to cut it drastically. So, for the RBI, there will be no incentive to cut further below 6.00% as banks are not in a position to transmit lower rates further to its borrowers. The RBI will also wait for the new government, their full budget in June/July and borrowing programs.

On Tuesday, the Indian market was helped by banks & financials, automobiles, FMCG, media, metals, pharmaceuticals, reality, energies (positive dredging policies), commodities, consumption, infra, and MNC, while dragged by techs (IT) on lower USD.

Nifty was helped by RIL, ITC, L&T, SBI, ICICI Bank, HDFC, Bharti Airtel, Sun Pharma, Indusind Bank, Indiabulls Housing Finance and VEDL, while dragged by TCS, Infy, Tech Mahindra, Bajaj Finance, Kotak Bank, HCL, Wipro, Asian Paints, Bajaj Auto, and M&M.

Technical View (Nifty, Bank Nifty, USDINR):

Technically, whatever may be the narrative Nifty Future (NF) has to sustain over 11350 for a further rebound 11400*/11475-11505/11555 and 11600*/11665-11730/11800 and further rally to 11850/11895*-11990/12090* in the near term (under bullish case scenario).

On the flip side, sustaining below 11330 NF may fall to 11290-11210 and 11140/11075*-11030/10970* and 10900/10860-10700/10650* and further 10560/10530*-10450/10300 in the near term (under bear case scenario).

Technically, Bank Nifty Future (BNF) has to sustain over 29150 for a rebound to 29200*/29315-29425*/29515 and 29615/29775-29925/30075 and further 30215/30315-30715/30915 in the near term (under bear case scenario).

On the flip side, sustaining below 29100, BNF may fall to 29000/28700*-28500/28290 and 27900*/27600-27400/27200 and further to 26650/26400*-26150/25900 in the near term (under bear case scenario).

Technically, USDINR has to sustain over 71.00 for a further rally to 71.55/71.90-72.15/72.65 and 72.95/73.65-74.00/74.50 in the near term (under bullish case scenario).

On the flip side, sustaining below 70.80, USDINR may fall to 70.40*/70.00-69.50/68.90* and further 68.20/67.50*-66.95/66.35 in the near term (under bear case scenario).

India 50

Nifty tumbled Monday on negative global cues as Trump trade war escalates with China and as India may be heading for a political uncertainty coupled with macro worries:

The Indian market (Nifty Future) closed around 11185.05 Monday, tumbled almost -1.08% on negative global cues as Trump trade war escalates with China and as India may be heading for a political uncertainty coupled with macro worries. As India is heading for 7th and last round of the general election on 19th May (Monday), exit poll will be published in the evening soon after the polling ends on next Monday. In that sense, 21st May (Tuesday) will be vital for the market even before the result on 23rd May, which may be delayed this time for higher WVPAT (paper ballot) counting.

As per various unofficial betting sources (reports), BJP/NDA may get 185-220 seats, while INC/UPA may get 160-185 seats this time. In other words, neither BJP/NDA nor INC/UPA, two mainstream Indian political parties in India will get any simple majority (272 seats) and the king-maker will be various regional parties (United India) and their leaders; especially Mamta Banerjee of TMC in WB and Mayawati of BSP in UP.

There will be four scenarios:

BJP/NDA got a clear simple majority of 272 or more seats under the PM candidate Modi; Nifty could zoom by 10%; but the overall rally could be limited this time amid macro worries, mixed earnings, and negative global cues.

INC/UPA got a clear majority of 272 or more seats (very unlikely) under the PM candidate Rahul Gandhi; Nifty could correct around 10% coupled with negative global cues.

Neither of BJP and INC got any clear majority (very likely) and United India (regional parties) led by Mamta Banerjee/Mayawati/Naidu give support INC/UPA to form the government under PM candidate Rahul Gandhi; Nifty could crash by 20% (lower circuit) even with positive global cues as Gandhi will have to depend on United India’s whims and fancies. We could see the policy paralysis again.

Neither of BJP and INC got any clear majority and Rahul Gandhi/INC decides to stay on the sideline (rather than facing a humiliation of a “Puppet/Pappu” PM) and extend outside support to United India led by either Mamta Banerjee/Naidu or even Mayawati (in India, everything is possible); Nifty could plummet by more than 30-40% in a couple of days/weeks in that nightmare scenario, depending on who will be the PM.

Now after the election, the market will focus on economics from politics, which is not in great shape, thanks to increasing political populism (in the election year) and growing fiscal deficit both as state and federal government levels. The revenue shortfall for FY-19 is around INR 1.26T. The Indian Federal government reported a fiscal deficit of 3.44% for FY-19 against a revised target of 3.4% (raised from 3.3%), just below 3.45% (~3.5%) on account of expenditure roll over, expenditure savings and fund transfer from other public accounts (to meet cash shortage). In the absence of such window dressing of government accounts, the fiscal deficit could soar to 4%.

The revenue shortfall is a reflection of India’s slowing growth, huge unemployment/under-employment, muted real wage growth, subdued consumption, and consistently higher borrowing costs. India is not an export-oriented economy, but it’s mainly driven by domestic consumption story. Thus the economy or the stock market is not so much affected due to Trump trade war, although there are pockets of concerns.

But Trump’s bellicose Iran and Venezuelan sanction policies are affecting smooth flow of cheaper grade heavy/medium grade crude oil to the country, where large refineries including that of RIL’ are mainly designed to process heavy/medium grade crude oil and the US grade shale (crude) oil is too sweet and too light to process. The combination of higher USD and higher oil is toxic for the Indian economy, negative for the dual deficits (fiscal as-well-as current account deficit-CAD). Due to a supply shortage, Iranian/Venezuelan grade heavy/medium grade crude oil is already selling under huge premium from alternative sources, like Russia’s Ural grade.

Looking ahead, oil could soar more to around $75 (WTI) due to U.S.-Iran/Venezuela and geopolitical tensions at Strait of Hormuz, OPEC+ production cut agreement extension to Dec’2019 and Trump’s bellicose trade policies. As per an estimate, every $10 increase in oil could worsen India’s CAD by 0.5%.

The Indian domestic consumption stories are now fading as the economy is trying to convert from “black” to “white”, especially after DEMO. Not only high-value consumption like automobile purchase, air travel has been affected, but lower value day-to-day groceries (FMCG) consumptions are also being affected due to various reasons as the economy is slowing down and consumer confidence is getting affected amid muted real wage growth.

The Indian economy may be still growing at the highest rate, but that is too little and too late to produce sufficient well-paid jobs in the country. India needs to grow at double-digit growth to produce sufficient well-paid jobs for the huge workforce and also need a structural transformation in its education/skill training system.

The formalization of the economy after DEMO and GST is making small business unviable as the cost of compliance is too high. The hurriedly launched GST is itself a very complex one with multiple tax rates and the average weighted GST rate may be the highest among the EM/DM economies. Overall, a person is contributing almost 60% of his average income to various direct and indirect taxes in the country with no basic social security system. This is also affecting consumer spending in the country as the overall economy is quite costly. In this way, India can never match China, South Korea or other advanced EM economies and their middle-class population/consumption.

India can also never replace China, South Korea or even Vietnam as an alternative manufacturing source amid Trump trade war. Although labor cost will be lower (in terms of USD) due to devalued INR, the imported cost of raw materials will be huge and not viable.

Talking about real economic growth between NDA and UPA era, there is not so much difference; INR is devalued more in NDA (natural), bond yield (borrowing costs) are more or less at the same high levels of 7.50% on an average. The INR is still not fully convertible despite so much optimism about the Indian economy under “Modinomics”.

The average speed of Indian railway little improved from a mere 55 kmph under the NDA government, showing little economic growth on the ground (reality) for the huge Indian population. Airlines are still struggling, be it KFA or Jet; thanks to very high regulatory costs of doing business in India from higher borrowing costs to high ATF duties and abnormally higher AAI charges.

The country has no authentic official employment, wage growth data till now (despite more than 95% UID penetration) so that RBI could be mandated like Fed and other standard global central banks in their dual objective of maximum employment and price stability.

Overall, Nifty (spot) plunged over -4% in May (till now) on political uncertainty, higher oil and macro worries after a rally of almost +9% in the last two months on hopes of a Modi mega-win in the election. USDINR surged around +1.80% in the last two months (till day) after a slump of -0.50% in Q1-2019. The Indian 10Y bond yield is hovering around 7.40% in line with global/US peers (risk-aversion due to Trump trade war).

Apart from political and macro worries, poor health and credit crisis at India’s NBFC/HFC is also affecting the overall sentiment. The government also admitted that the NBFC sector is facing issues of the “credit squeeze, over-leveraging, and misadventures by some large entities”. After the DEMO, MFs were flushed with funds, which in turn acted like big banks/lender (as banks are reluctant for corporate lending) without adequate risk management, pushing the overall sector towards like a “Lehman crisis” moment (India’s subprime crisis).

Over the last few years, a significant number of super-rich industrialists have left the country for various reasons (apart from some celebrity defaulters) and this is also one of the primary factors behind today’s muted capex and subdued high-value consumption along with slowing credit flow due to huge NPA/NPL crisis in the formal banking system.

USD/INR

USDINR-I is currently trading around 70.55, slumped almost -0.25% with a session low-high of 70.42-70.70. It made a recent low-high 69.42-70.68 ahead of the election.