Nifty Closed The Aug Exp 0.8% Lower As It Failed To Hold On The Opening Gains Ahead Of Yellen Speech Tomorrow---What's Next For Sep ?

Nifty closed today around 8592 (-0.72%) near session low of 8586 after making an opening high of 8685.

Now, looking at the chart, for NF-Sep (CMP: 8639), sustaining below 8610 zone, it may fall towards 8560/40*-8470-8355 and 8295*-8230-8120 area in the immediate to short term.

On the other side, for any meaningful strength, NF has to sustain over 8680 area for further rally towards 8725-8765/85*-8825 and 8875*-8925-9075 zone in the immediate to short term.

Today Nifty opened higher despite tepid global cues and overnight US market selling (-0.35%) on the back of slump in oil (US inventory data & lower import by China coupled with some concern about any real output freeze). Later, after EU market opens, IFO business sentiment data drags the global market to some extent.

But, soon after Indian market open, it faced some wave of selling/long unwinding (?) in the last day of Aug exp series and the same was intensified in the last hour of trade.

Incidentally, there was some report from Goldman Sachs, in which they are predicting 7.9% GDP growth for FY-17 on the back of better monsoon this year, incremental FDI inflows, expected increase in consumer demand led by 7-CPC liquidity & key reforms in an incremental manner.

But, as par GS, any rate cut probability is virtually nil till Dec'16 owing to higher trajectory of CPI, which may not come down to the RBI's comfort level of around 5% due to probable wage inflation effect of 7-CPC, recovery in crude prices and narrowing of output gap. 

But, GS also expecting a headline CPI of around 5% by March'17 and RBI may cut by 0.25% in Feb'17 accordingly.

Looking ahead, as 4-th Sep is coming closer (Rexit day), all eyes will be on the next "owlish" (vigilant) RBI Gov (Urjit Patel) for his comments about inflation targeting, banking sector reforms, resolution of India's twin balance sheet pain, overall liquidity management (OMO operations), corporate bond market reform (very few buyers & sellers as of now) and FX rate (USDINR) policy area. 

Going by his known "inflation hawk/warrior" stance, Patel may follow the same RBI policy under Rajan's legacy and overall RBI stance may be "accommodative" as of now. 

But the Indian market was expecting someone more dovish than Patel who can unleash a slew of "Bazookas" to stimulate the overall Indian economy.

Patel may also give stress on the transmission factors for the previous rate cuts under Rajan. So far, only around 50% of the previous RBI repo rate cut of 1.5% has been transmitted by the banks and going by the present trend and various macro economic factors, present small savings rate & bank's statements, one can expect another 0.15-0.25% rate cut transmissions till Dec'16.

But, as par India's commerce minister, MSME are currently undergoing severe stress & they need affordable bank finance and demanded 2% repo rate cut from the present 6.50% and full transmission of previous rate cuts by the banks by FY-17-18 !!

There was also some concern about incremental nature of India's banking NPLS (stressed assets), which jumped to around 11.5% in June'16 from the level of 5.5% in March'15. 

Some section of the market believe that these NPLS are for the reckless lending by the PSBS in 2007-08 & 2012-13 time on the back of some over jealous corporates and should be recognized much before now, rather than hiding it for years under the clamor of various types of CDR. 

Going ahead, we may see more such stressed assets coming in the light, once the present team of CMDS of the public sector banks end their respective terms and there may be around 15% of NPLS in the Indian Banking System to be visible by FY-17.

Also, mere "recognition" of NPLS is not enough for the PSBS; what they need is actual "resolution" or recovery of the huge NPA/NPLS; otherwise, in the absence of well capitalized PSBS, who will fund the "India growth story" ?

Although, Q1FY17 result are good and there are some story of blockbuster earnings growth (YOY), the same came on the back of comparatively lower base and other non-operating factors, such as de-leverage. 

Actually, 2015-16 year may be termed as the "year of de-leverage". While this is a right step for the stressed Indian corporates, most of them having quite stretched balance sheets, core earnings/EPS of the corporate India is now near at historical 20 years low level. 

Analysts are expecting an average 16% EPS growth for FY-17 and in that scenario, FY-17 EPS will be around 425 and FWD PE will be around 20.50 at Nifty level of 8700 against average PE multiple of around 16-18. At 18 FWD PE, fair value of Nifty may be around 7650 (425x18).

But, what ever be the rationality, market actually follow fund flows and its the massive ETF buying by the FPIS, which may be the main reason for the above 25% rally in the last six months as global investors are chasing positive yields in the world of negative bond yields. 

But, global bond yields may also be recovering now after going into negative/life time low territory and in that scenario, fund flow may reverse from EQ to bond again in the coming days.

After India market closed, Govt/RBI has announced a slew of policy measures to boost investor participation in corporate bond markets/"masala bonds" and currency markets, which may be good for the banking sector and overall market sentiment in the medium to long term.

SGX-NIFTY