Nifty Closed The Day Around 0.70% Higher Helped By PSBS & Positive Global Cues Supported By "Surging" Oil Ahead Of India CPI/IIP & US Retail Sales

Nifty Fut(Aug) today closed the day around 8672 after making a day high of around 8702 & opening low of 8614, but finished the weak by round 0.4% lower.

 

Looking at the chart, NF has to sustain over 8690-8715* for target of 8750-8785*-8825 & 8875*-8950-9075 in the immediate to short term.

On the flip side, sustaining below 8675*-8610 zone, NF may again fall towards 8560*-8480-8380 & 8270*-8200-8110 area in the immediate to short term.

Technically, weekly closing below 8675 may be an early indication that the present liquidity fulled rally is exhausting and consecutive 3 days closing below 8560-8480* zone will confirm the likely correction towards 8000-7800 in the coming months.

The above technical view will be invalidated, if NF is able to close at least 3 consecutive days above 8785-8875* zone and in that scenario, 9075-9200 zone will come first.

Today's morning Asian cues was positive after overnight US market rally (+0.64%) mainly fulled by surging oil (+5%) and all the major 3 US indexes (S&P-500/Dow Jones/Nasdaq) reached all time high at the same time (a rare occasion after 1999).

Although, today's morning Chinese data (IIP/Retail Sales/Fixed Asset Investments) came slightly below consensus, the Chinese authorities dubbed it as some negative effect of havoc floods and hot summer. Nevertheless, some negative data now-a-days also interpreted as more central bank stimulus and Chinese market surged along with its global peers.

Increasing divergent stance between Fed & other major central banks also causing USD rally. Crude oil is also fulled by increasing verbal intervention of OPEC and Saudi Arabia, that they will "soon take action for production cut. IEA comments about oil market re-balancing within "next few months" also supported Oil to a great extent.

Back to our market, ahead of CPI & IIP data, all eyes was on SBI Q1 result after yesterday's horrific BOB numbers. But, SBI numbers came above street estimates and it may also be showing that all is not so much bad with the PSBS as expected. Consequently, SBI rallied by around 9% and all the major PSBS followed. The SBI result may be at par/above consensus, but the fresh slippages are also sharply higher and the management comment that full resolution process of NPL will take time may be also indicating that pain of twin balance sheets are far from over in India.

Today market was also supported significantly by Axis & Yes Bank (MSCI Rejig) and RIL, but dragged by BPCL, TECHM & INFY.

Auto stocks (4W) were in the limelight today after SC lifted the NGT ban on diesel cars (above 2000 cc) in NCR, but there was a catch that buyers/manufacturers will have to pay extra 1% EV cess also. This levy may also be extended to other diesel vehicles below 2000 cc in future. (M&M, Tata Motors & Maruti surged).

Meanwhile, July CPI just now came at 6.07% against street estimate of 5.90% (MOM: 5.77%). It may be very difficult for RBI to cut rate in Oct, if this trend will continue in Aug CPI as the headline inflation number is much above RBI's comfort/target zone of 5%. Now, for CY-16, average 7 months CPI is around 5.55%, which may be far more than RBI's comfort zone and reduced room for Oct rate cut.

Average retail food inflation surged by 8.35% in July against 7.79% in June. But this may be also interpreted as "topping out" and after Aug, there may be some visible effect of better monsoon and food supply management (pulse import, prohibition of future trading in Sugar etc). 

But still, there may not be any "Diwali Gift" this year (Oct) from the RBI in the form of any rate cut (0.25%) and expectations of the same will be build up for Dec'16. RBI may focus more on NPA & liquidity management and full transmission of previous rate cuts. So far around 50-60%  of 1.5% repo rate cut has been transmitted by the banks. 

This may be a catch-22 situation for the banks as they may not get any immediate rate cut differential unless & until they pass on at least 75% of previous rate cuts. But for that to happen, bank's average cost of funds need to go down substantially along with India's small savings rate. Also Indian banks, specially PSBS need to resolve the present NPL crisis, otherwise there may be severe liquidity crunch, despite Govt's "Indradhanush" initiative.

There may be double whammy of 7-CPC induced liquidity (wage inflation) and GST (if implemented from April'17) on core inflation in the coming months.On the other side, Govt's fiscal position may also be in severe stress because of 7-CPC pay out with arrears in one shot (Indian version of "Helicopter Money") as par FM's own admission today. If the central Govt will have to compensate any real revenue loss to the states in future as promised, when GST will be implemented, then the FM of that time may have to pass "sleepless" nights also. 

India's cumulative fiscal deficit may worsen also, when all the states will have to increase their pay scales in line with 7-CPC.

But despite Govt's best effort to stimulate the economy by "Helicopter Money" and public investments (Govt's capex for infra etc), private investments are not picking up and that's the real disappointment.

It's a dilemma that India may be the "World's fastest growing economy" (+7.8%) but at the same time may also be the "World's high inflationary economy" (+6.07%) among OECD/EM(s) and may be also at the opposite end of the inflation curve wrt the DM(s). Its a paradox that while DM(s) are fighting with deflation, India is still fighting with inflation.

On an average, a middle class small family in India may have to spend now almost 75% of its monthly earning to housing rent/loan EMI(s), child education and daily expenses etc. So, from where the expected consumer spending will come ? 

Indian economy may be growing at around 8% in the new methodology (?), but in the real street, its not able to generate adequate jobs with decent pay packages for the general masses, despite favourable demographics and no dearth of educational qualifications. There may be severe lack of practical skills as a recent survey indicates that a major portion of India's MBA(s) are not fit for any decent corporate job at all (except IIMS).

June IIP came good at 2.1% against consensus of 1.5% (MOM: 1.2%; YOY: 4.2%), but it may be a non-event for our market now as this is still in the old series unlike GDP.

June IIP was mainly supported by electricity/power generation (+8.3%) and mining (+4.7%), while dragged by manufacturing goods (+0.9%; YOY: 5.2%); capital goods (-16.5%; YOY: -2%),

With headline inflation accelerating, rate sensitive stocks may be volatile next week.

Technical Chart: SGX-Nifty

CPI Image Courtesy: PTI/BS