Nifty consolidates around new 1 year high amid positive global cues supported by blockbuster US NFP and decent China trade balance ahead of RBI tomorrow; What's in the store ?

Nifty Fut (Aug) today closed around 8729 (+0.24%), around day low of 8726, after making an opening session high of 8760. Today was a very range bound trading day, except some stock specific actions.

Looking at the chart, now sustaining below 8725*-8690 zone, NF may fall towards 8645*-8540-8480 & 8370-8270*-8180 area in the short term.

On the other side, sustaining above 8755-8785* zone, NF may scale 8825-8875*-8950 & 9015-9075*-9200 in the near term.

 

Today, India market is perhaps waiting for tomorrow's RBI policy meet. Although, probability of any rate cut action is very thin (10%) as par market expectations, considering Rajan's ability to give occasional surprise to the market, some sections are also hoping for any "farewell/parting gift to the nation" in the form of an unexpected cut (0.25%). Will Rajan oblige ? 

But more than any rate cut action, market will also eager to listen the last policy statement by Rajan and any imminent announcement by the Govt for the next RBI Gov & MPC and follow up of Rajan's legacy.

Recent Govt announcement regarding inflation target range ( 4% +/- 2%); i.e. range of 6-4-2% may make RBI more room for future rate policy. But, in a country like India, inflation management by RBI without structural help by the Govt may be quite difficult also.

At 8700 Nifty, the TTM PE is very near to 23.85 and Q1 earnings so far are decent/in line with estimates. Thus valuation is quite stretched and some smart money may be quite cautious on the long side too.

Indian market is supported by "power of liquidity" by FPI(s), Govt's initiatives for incremental reforms (slow & steady), better/normal monsoon this year (rural consumption story), 7PC liquidity induced expected consumption, improving FDI, high public spending, specially in infra (Govt's capex), passage of GST enabling amendment bills in the RS and hopes of GST roll out from April'17 and improving auto sales in July.

But, lack of private capex, overall tepid consumer demand, pain of twin balance sheets, probable absence of favourable base effect for FY-18 earnings, significantly higher trajectory of inflation compare to other EM/DM (s), delay in actual roll out of GST to FY-18 or after FY-19 on the face of growing political games may be some of the headwinds in the coming days. 

India's arbitrary taxation system, slow & long legal remedies (from session court to Supreme Court and arbitration), inconsistency in policy continuation,  lack of transparency & good faith are some of the stumbling blocks for FDI. Recent Vodafone/Cairn/Tata-Docomo issues are some of the examples. As par some reports, India also served notice to 57 countries to scrap the present BIT (bilateral investment treaties) and signed new ones, which is basically designed to avoid the increasing international arbitration.

As par some reports, India may be a great country for inviting inward investments, but when some one decides to exit India, it may be simply the opposite. India has to gain trusts of foreign/angel investors for both inward & outward investments.

Another factor is that, although India is growing around 8%, its not producing adequate employments for its young demographics to create adequate demand in the economy.

Thus the present liquidity driven rally may pose severe risk at any point of time on the face of any global financial crisis like Oil/SWF selling, China Yuan devaluation ( as in Aug'15-Jan'16), ongoing Brexit uncertainty, Trump winning US presidential election this year, EU/Italian/China banking crisis etc.

Although, last Friday's US NFP data are excellent, some analysts are also concerned over the recent volatility of the data. In any way, all eyes will be now on the forthcoming Yellen speech at Jackson Hole Symposium in the last week of Aug and Sep Fed meet. Most probably, Fed will do nothing in Sep, because of US election in Nov and may take a call for a 0.25% rate hike in Dec'16. But still, as other G-10 central banks are talking about more cut/QQE, Fed may not hike at all till 2016 as that will make USD much more stronger (divergent policy between Fed & other central bankers).

On the other side, US market is also going deep into a bubble zone at around 24.85 TTM PE (S&P-500 at 2180), a sense of caution may be highly warranted despite power of central bankers liquidity.

Technically, S&P-500 (Fut), which is trading now around 2180, has to sustain above 2200 & 2230 zone for any further rally up to 2265-2365; otherwise it will come down towards 2095-1980 zone in the near to mid term. 

As far Indian market is concerned, technically its safe, until & unless it does not close consecutively below 8480 (for longs) or above 8675 (shorts). Although, NF today comfortably closed above 8675 as a result of gap up opening, next two day's closing is important for follow up action.