Market Wrap: Nifty Fut Closed Around 0.65% Higher Amid Hopes Of Aug Rate Cut By RBI, Fitch Rating Up-Grade, Imminent Arrival Of Monsoon & "Neutral" Fed

Nifty Fut (June) closed around 8283 after making a low of 8232 & high of 8319 post RBI policy announcement.

Looking forward, technically NF has to sustain over 8335-8350 zone for target of 8405 area.

On the other side, sustain below 8295 area, it may fall again towards 8195-8150 zone.

 

Today's RBI policy is basically a "non-event" as expected, but the overall tone of the RBI may be on the "hawkish" side as it is little concerned about CPI trajectory (specially food inflation) and emphasized on structural reform (supply side lacuna, full capacity utilization etc). 

RBI is also concerned over higher commodity prices, specially the Crude Oil. So, for the time being, probability of rate cut may be limited in Aug'16, although some market participants think that 0.25% cut may be a "parting gift" by Rajan, before he exits in Sep'16.

As par RBI, Indian economy may grow around 7.6% GVA in FY-17, led by 7-PC induced consumer demand, rising consumer confidence, improving expectations of employment, spending, rural demand helped by prospect of good monsoon and rising capacity utilization (some of the "green shoots" of the Indian economy). 

But all these good projections by the RBI may be also translated as "there is no need for further immediate rate cut" as the Indian economy may be progressing quite well around 7.9% GDP.

On the other side, while public investments are relatively strong led by infra spending (roads & railways), private investments are tepid and there is no sign of any revival, which may be some of the concerns of RBI, which may force it to act by late FY-17.

Now, full rate cut transmissions by the banks, recovery of the huge NPLS/NPAS, legacy issues of "twin balance sheets" and corporate credit growth are some of the drivers, which can create demand, make capacity utilization better, create jobs (vicious cycle of demand/investment/growth).

Unless, the above structural issues are properly addressed, limited rate cuts alone will not solve the problem of Indian economy, whoever be the next RBI Gov.

If the next RBI Gov reduced the repo rate drastically to a lower level (say, 4-5%), then massive selling can be seen in the bond market as interest rate and bond yield differential between US & India will narrow and consequently INR may be depreciated to 71+ level and we may see huge selling in Equity market also.  

(US 10Y Bond Yield is around 1.75% against India's 7.50%; Diff 5.75%; Interest rate differential is around 6.25% and inflation differential is around 4.4% between US & India).

Interestingly, in today's RBI meet, Rajan did not clear about his exit speculation as expected, but the uncertainty remains. Market may not like such uncertainty and by June'16 end, both Rajan & Govt may clear this exit speculation after Fed meet & Brexit vote.

Apart from the above factors, GST & actual progress of monsoon may be some of the drivers of our market in the near term.

Analytical Charts: