Nifty "Rallied" By Only 23 Points After "Hawkish/Owlish Cut" Of 0.25% By RBI Amid Tepid Global Cues

Market Wrap: 04/10/2016

Nifty Fut (Oct) today closed around 8802 (+0.26%) after recovering from the session low (8765) post RBI cut and made a high of 8820.

Technically, for tomorrow (05/10/2016), NF need to sustain above 8835-55* zone for further rally up to 8875/8900*-8930/75-8900/9025 area in the immediate to short term.

On the downside, sustaining below 8795-60* zone, NF may fall further towards 8715/665*-8595/30-8475/25 area in the immediate to short term.

Broadly speaking, consecutive closing (3 days) above 8875 area, NF may rally up to 9185-9235 & 9325 zone (Diwali Rally??) and consecutive closing below 8530 area (for any reasons, whatsoever), NF may crash to 8125-8075 & 8000 area in the near term (Brexit & Nov US election uncertainty??).

Today's global cues were tepid after GBP made 31 yrs low as market is slowly catching up with the reality of the UK's exit process from the EU. Though Britain is expecting to strike a number of special trade negotiations with EU and several other countries including US, everything may depend upon the actual outcome of those negotiations. 

As par reports, unless EU authority receives an "official notice for this divorce", no real negotiation is possible. Even UK invokes article-50 by March'17, the complete exit process may take up to 2019 and there will be an environment of uncertainty, especially for the banks & financial sectors, which is the backbone of the UK's economic strength. 

It’s true that the recent huge devaluation of the GBP because of Brexit is helping the UK Mfg sector a lot on the export front, it’s basically a service oriented economy. Although UK is presently enjoying both sides of currency devaluation and EU/EZ trade advantage, it is not possible to go on for longer simply because of other EU countries are suffering (Specially Germany).

Also, there was some report that DB negotiation is still on with the US-DOJ and its CD spiked also, putting some pressure on the "risk trade" again.

Globally, all eyes will be on the Friday's US NFP after yesterday's improved ISM Mfg PMI data (USD is getting stronger for a probable Dec rate hike).

Back to home, all focus of the Dalal St was on the "Mint St" (RBI) today for the much awaited "Diwali Gift" from the new RBI Gov/MPC.

"Mint St" did not disappoint the "Dalal St" and cut the repo rate by 0.25% with corresponding adjustments in the reverse repo/MSF/Bank rate. Subsequently, market rallied by some extent from the day's low and ultimately settled almost flat for Nifty and Bank Nifty closed up by 0.63%. After policy decision, there was some visible rally in the PSU banking space.

Although, majority of the economists were polled for no rate cut this time, a major portion of the market participants was expecting at least 0.25% cut by the RBI, considering the last few days’ price action, especially for the BNF from the "Surgical Strike" day low.

Moreover, the overall RBI commentary may be quite "hawkish/owlish" (cautious), regarding the future inflation trajectory and global geo-political events (like risk/uncertainty of US election). 

Also RBI may be quite concerned about global growth projection by IMF and weak global demand, which is affecting the India's export trade.

RBI is also very cautious on the NPA/NPL situations of the banks and is taking some tough measures with pragmatism. RBI will publish fresh guidelines for effective recognition and resolution of the stressed assets by Oct end.

But, there was a market buzz that going forward, RBI will recognize the portion of stressed assets under SA4 as standard, which may help the banks (specially the PSBS) to lower its provision number and report better bottom line. This may be the primary reason for the rally in PSBS after RBI meet today.

Another point may be that with this Oct rate cut, probability of another cut by 0.25% in Dec'16 is almost nil now as in the recent history, RBI never cut rates twice in consecutive meet except there was a global financial crisis (Black Swan event). 

So, if there is no geo-political shock in Nov (US election risk), RBI may act further only in Feb'17.

At present repo rate stands at 6.25% after the overall 1.75% cut in the last two years or so and CPI sands around 5%. Thus real rate of interest is around 1.25%, already below RBI's policy goal (1.5-2%). 

In order to cut further 0.25%, CPI needs to fall around 4.5%. RBI's own projection of CPI may be 5-5.5% for the rest of FY-17. 

RBI is cautious on the CPI front because of 7-CPC induced liquidity and any short term impact of GST (scheduled to be rolled out by Apr'17). 

Also, food inflation in India is largely structural in nature and unless there is some structural reform (supply side management, storage & logistical issues etc), it may be continue to be seasonal as of now for the foreseeable future.

So, we may be at the bottom of this rate cut cycle at present (max another 0.25% cut in Feb'17).

Another issue may be proper transmission of the RBI repo rate cuts by the Banks. Only 50-60% of previous 1.50% rate cuts has been transmitted by the banks so far. It will be interesting to see, how banks lower the borrowing costs for the Indian economy by effective transmissions for this overall 1.75% cut so far.

Thus looking forward, apart from the global cues & Q4FY17 earning session, progress of GST, geo-political tension between India-Pak, all eyes will be on the inflation trajectory for India and existing rate cut transmissions by the banks. 

If banks are not ready for corresponding rate (MCLR) cuts, then what is the benefit for the borrowers/investors/consumers? It may be only beneficial for banks themselves because of bond yields difference.

Although, India's GDP has grown by 7.1% in Q1FY17, the slowest in the last six QTRS, RBI is expecting a revival of growth in the days ahead supported by good monsoon (agri growth & revival of rural demand), a pay bonanza for certain Govt employees (7-CPC) and festival season buying (better consumer spending).

But RBI is also very cautious about 7CPC induced liquidity/house rent, rural minimum wage growth spillover effect on the CPI going forward.

Apart from tepid global cues, renewed & repeated cease fire violations at India-Pak border may also kept the Indian market under some pressure today.

Overall, next few days price action may be vital for an overall direction of the market from here as almost all the "good news" has been priced in.

 SGX-NF