Technical & Macro Analysis Of Indian & Global Market----: Bank Nifty-I: 19500-19700 May Be A Big Hurdle As New RBI Gov Is An Inflation "Hawk" And Not A "Super Mario" As Market Expected

Trading Idea: BNF-I

LTP: 19427

Sell around 19500-19700

TGT: 19280*-19125-18900*-18650-18500-18300*-18000-17750-17500-17300* (5-15 days)

TSL> 19800

Note: Consecutive closing (3 days) above 19800 for any reason, BNF-I may further rally up to 20000-20150*-20300-20750-20950*-21250 in the immediate to near term (alternative bullish case scenario).

Any one holding long positions in BNF-I or planning to do so, may also watch around 19280-18900* zone as nearest positional support area.

Appointment of Urjit Patel as new RBI Gov may be positive For Indian bond market, being an Inflation "Warrior" (just like Rajan);

But it may be neutral to negative for Equity markets (at least for the short to mid term) as immediate rate cut hopes in Oct'16 or even in Dec'16 dashed out significantly.

Market may be already discounted by a large extent for a more "Dovish" RBI Gov who can unleash major monetary stimulus (like "Mario Draghi") and rate Cuts of at least 0.50% in FY-17

On a lighter note, Patel may be just the predecessor ("Chota Rajan") of his present boss with a soft spoken but effective approach unlike Rajan's "out spoken & rock star" image & face book likes and "James Bond" types of commentary ("I am Raghu Ram Rajan and I do what I do").

As expected, Govt announced yesterday the name of the new RBI Gov after months of various speculation & suspense. For the last few days, there were basically two names for the post (Subir Gokran & Urjit Patel) and thus announcement of Patel as next RBI Gov is not at all unexpected.

Govt/PMO & FM, this time choose to play safe without any new experiment and appointed Patel as the next RBI Gov, who is the present deputy of RBI Gov (Rajan) and in this way basically ensures smooth transition, continuation of present policy of inflation targeting (below 5-4%) and others like NPL & liquidity management, full transmission of previous rate cuts & MPC functioning.

While this is a definitely positive step by the Govt to ensure the continuation of present RBI policy and not to loose the trust of institutional investors (specially FPIS after Rajan's legacy) by appointing someone new from different roles/bureaucratic positions, going by the recent price action, market or BNF may be expecting some one more dovish as the next RBI Gov than Patel.

Govt, by appointing Patel, (who is no doubt a brilliant economist/academic and habituated with the RBI functionaries for years and architect of the present inflation targeting and the MPC stance of the Govt/RBI and bank liquidity beyond usual repo window) tried to ensure a person as the next RBI Gov, who is comparable to Rajan's legacy, but not bearing the "rock star" image, not too much outspoken (specially beyond RBI's policy & economy domain) and someone, who is not bigger than the Govt & "RBI" institution image itself.

Also, in the proposed MPC, there will be three Govt appointed nominees unlike with other MPC in the developed economies, where only central bank officials serve with no Govt representative. In this way, there may be doubt about independence & credibility of RBI as an institution in the future, which may make FPIS little nervous also.

But, whoever be the RBI Gov, scope of any drastic rate cuts is very limited in India as RBI/Govt will ensure at least 1.5% real rate of interest (RRI: Diff between headline RBI repo rate & CPI)

RRI is now at 0.43% ( 6.50-6.07) and going forward, even if CPI dips to 5.5% by Dec'16, RRI will be then 1%. Thus, in the present scenario, RBI may consider a 0.25% cut by Feb'17, only if headline CPI dips below 5% and the overall inflation trajectory looks incrementally lower.

As of now, the last 7 month's average CPI is around 5.55% against July figure of 6.07%, which was mainly contributed by food items (0.66%).

There may be some fall in the food inflation in the coming months going by the good monsoon, forthcoming winter season (vegetables prices will fall seasonally) and better food supply management (Pulses, Sugar by import & future trading restriction) and CPI may fall to around 5.50% by Jan-Feb'17.

But even then, there may be some impact of wage inflation on the overall CPI as a result of 7-CPC & OROP induced liquidity, which will make the CPI to dip below 5% very tough and in that scenario, we may have only one rate cut of 0.25% by FY-17 as there will be immense pressure on the RBI from the Govt as well as industry/business lobby.

Going by the nature of food inflation, its primarily structural in India, where there is severe lack of proper distribution or logistical/cold chain infrastructure in the vast part of the country. RBI repo rate has very little co-relationship with it apart from the fact that lower interest cost (easy money) eventually boost up the asset prices/demands (real estate or financial assets), which ultimately is responsible for more demand, (even at inflated prices) than supply.

Similar types of food inflation may happen aided by wage inflation amid 7-CPC to all the central as well as state Govt employees eventually (Indian version of "helicopter money").

In India, there is also significance income discrepancies between top/mid & lower level of the economy and no Govt will take any risk for an uncontrolled food & other types of inflation (like in housing/rental, education) and there by jeopardizing its poll prospect.

Another point is that Govt is not ready for proper transmission of lower global oil prices in the economy and if that was happened, India should have at least 0.5% lower CPI (as par some calculation, every $10 fall in oil may be equivalent to around 0.15% fall in headline CPI). But, Govt has no option either, because very limited people in India actually pay any income taxes and thus the Govt need adequate revenue from other sources of indirect taxes.

Thus India is a high cost economy and actual RRI may be around 5% for borrowers (avg CPI 5.5% and avg borrowing rate may be around 10.5% including business -corporate/SME & retail-home/credit cards/personal loans). This RRI may be around 2% in the developed economies and thus Rajan or any other RBI Gov is not behind the curve, actually India is always behind the curve, at least structurally.

For savers, RRI may be now positive around 1.5-2% after many years, primarily driven by RBI/Rajan's stance of inflation warrior. This may be also one of the reasons for huge cash flow towards EQ linked instruments & MF from the real estates and Gold.

New RBI Gov's known hawkish stance may also continue this trend. But, if the same is sacrificed for much wanted growth/overall economic recovery in the months ahead, then the above flow may also reverse, which may result in incremental import demand for Gold and will be negative for India's CAD and INR may further depreciate.

Thus looking ahead, RBI/Patel's stance on inflation & overall monetary policy may dictate the market. Also, all eyes will be on the Nov-Dec'16 FCNR redemption for around $15 bln (out of $20 bln, $5 bln may roll over) and any probable instability on the INR along with Rajan's "deep surgery" like approach for the NPL recognition and resolve of the same.

For India, whoever may be in the RBI helm, drastic repo rate cut even to below 4%, level is not possible (by considering WPI as benchmark instead of CPI at present), because it has high deposit rates, specially for small savings area.

In a country like India, Govt may be also not in a position to lower the deposit rates because a major portion of its population only rely on it and they don't invest in equity linked products at all and any experiment with lowering of deposit rates may also adversely affected the sentiment of the common people (vote bank) and there by poll prospect of a Govt.

Despite benign nature of headline CPI, core inflation is still tepid in India and that may explain the lack of adequate underlying demand and lower capacity utilization, except some infra story at present aided by the Govt's capex, but still there is no visibility of revival of private capex. This may be partly explained by the tepid demand and pain of twin balance sheets.

Unless & until, pain of twin balance sheets are resolved by a large extent (deleveraging & recovery of NPLS apart from overall economic recovery), there will be significant liquidity crunch specially for the PSBS despite "Indradhanush" initiative by the Govt (which may be also too little & too late).

As of now, private lenders are not very much interested to extend fresh credits to the corporates (except high rated ones) and actually its the PSBS, which had done the major funding to the tune of almost 75% to the industry as business loan.

Apart from this liquidity & twin balance sheet issues, there is also a sense of fear mongering both among lenders & borrowers for fresh credits, specially after the KFA issues. So, in the absence of PSBS funding, who will fund the "India Growth Story" ?

Ultimately, at the end of the day, Patel may be preferred by Rajan himself to continue his legacy/present RBI policy and Govt may just played it safe this time without inviting any further negative publicity or effect on bond, INR or stock markets.

As par Patel's own statement, Gov (s), at RBI including him are not a hawk or dove, but an "owl" (symbol of wisdom).

Market will watch Patel & his MPC in the months ahead for the "owlish" monetary policy and its effect on the yield hungry investors in the world of negative yields (out of $200 bn monthly bond purchases by the central banks, almost $12 bln are yielding negative and this may be one of the reason for global surging in equities, specially in the EM(s)).

Valuation wise, at 19400, TTM PE of Bank Nifty is around 27.50 and may be quite expensive from its historical average of around 18-20. Around 28 PE, Bank Nifty may be in the bubble zone already and we may see significant correction, even after any initial euphoria.

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