Nifty closed below 8700 as RBI sounds hawkish without any "parting gift"

Nifty Fut(Aug) closed around 8698 (-0.51%) after making a Post-RBI low of 8662 and opening high of 8752.

Looking ahead, sustaining below 8655*-8635 zone, NF may target 8560-8520-8480* and 8365-8270*-8180 area in the immediate to short term.

On the brighter side, NF need to sustain above 8725-8785* zone for a target of 8825-8875*-8950 and 9015-9075*-9200 area in the immediate to short term.

Overall, in the ongoing fights between bulls & bears, the former needs to protect 8480-8270 (for buy on dips) and the later 8785-8875 (for sell on rise) zone respectively.

Today global cues are muted amid slight hardening of Chinese inflation and overnight tepid US market for the lack of earning news, fresh economic data and Fed commentary.

As expected Rajan did not alter any policy rates today despite some hopes of "parting gift". In that sense, today's RBI policy was neutral and its a non-event.

But, the monetary policy statement seems to be slightly hawkish, as the RBI expressed some concern over the recent uptick in CPI inflation and basically kept a target of 5% CPI by FY-17. Present Apr-June CPI is around 5.47-5.76-5.77%; i.e. the last three month's average is around 5.67%, where as Govt's mean target is around 4.5% or below 5%.

The upper trajectory of CPI by the RBI is based on firm global pries of commodities/Oil, foods, specially vegetables & pulses and effect of probable 7-CPC induced liquidity. But better monsoon this year may help to contain some food inflation in the 2-nd half of the year.

Basically, market is looking for a rate cut of 0.25-0.50% in the next Oct policy meet of RBI by the new Gov/MPC. But for that to be happened, CPI need to go below 5% to around 4.75% and in that scenario, RBI can cut by 0.25% to bring the repo rate at 6.25%, by keeping the real rate of interest around 1.5% (4.75+1.5=6.25%). 

Thus, keeping in view the present RBI policy, inflation targeting and Rajan's legacy, headline CPI need to be around 4.75% for the month of Aug for an expected rate cut of 0.25% in Oct.

But, in India, apart from policy rate, food inflation is also dependent on supply side lacuna to a large extent. On the other side, core inflation may be also a by-product of India's wage inflation to some extent. So far, core inflation is somewhat benign and better monsoon/revival of rural economy/7-CPC boosted consumption may make it to some upper trajectory.

Thus overall, if headline CPI will not move below 5% by 2-nd half of the current year, then market will assume the much awaited "Diwali Gift" of Oct'16 rate cut (0.25%) as one & off for FY-17; otherwise, there will be another rate cut of 0.25% in Dec'16 or Feb'17.

RBI is also putting great emphasis on the transmission of full rate cut of 1.50% done previously (till April'16). Banks, so far are able to transmit only around 50-60% of that. RBI is expecting that once the NPL situation get improved, the banks will pass on the rest of the rate cuts gradually amid improving liquidity management. 

But, at the same time, Govt also need to reduce the rate of the small savings rate in India; otherwise its going to be very difficult for an abrupt change/reduction in lending & deposit rate.

As par RBI, timely implementation of GST may be a challenge although it does not foresee any lingering effect on CPI except initial one & off.

Apart from the above inflation view of RBI, which is slightly hawkish, there was nothing new, which can drive our market from the one year high and thus, the market may see some profit bookings (long unwinding/fresh shorts).

All eyes will be now on the Govt to announce the name of the next RBI Gov and MPC, which may be announced either shortly (in the Parliament session) or after 12-th Aug (end of the current monsoon session).