Nifty Struggled Despite RBI's "Diwali Gift" & IMF's Better Growth Projection Amid Weak Service PMI And Greater Probability Of Fed Action In Dec

Market Wrap: 05/10/2016

Nifty Fut (Oct) today closed around 8768 (-0.36%) after an opening session high of 8838 and day low of 8750.

Technically, for tomorrow (06/10/2016), sustaining below 8755-35* area, NF may fall towards 8700/8650-8600/8570-8530/8485* area in the immediate to short term.

On the other side for any strength, NF need to sustain above 8795-8835* area for further rally up to 8875/8905*-8936/8975-8995/9030 area in the immediate to short term.

Today Indian market opened flat following tepid global cues amid talks of premature ECB tapering; although it was later denied by Draghi/ECB authority.

Among all the talks of ECB early tapering, contagion fear of "Real Brexit" coupled with good sets of US economic data/theme of Dec hike by Fed, USD is getting stronger and there was some sense of "risk aversion" and Gold was also being doomed.

As par latest FFR, market is expecting now almost 65% probability of Fed rate hike in Dec'16 and if there is no adverse geo-political shock (like "Trumpism"), Fed may be in action for a symbolic (?) 0.25% "dovish hike" (once a year as par previous dot-plots).

Globally, all eyes will be on the US ADP NFP  & ISM Non-Mfg Emp data today for an idea about the Friday's NFP report. A better than expected report may make the USD more stronger and we may see some "risk aversion" and also the vice-versa.

Back to home, Nifty struggled today despite RBI's surprise (??) cut yesterday and IMF's projection of better GDP growth in 2016-17 (from previous guidance of 7.4% to 7.6%).

Although, IMF has painted a tepid global growth scenario including US & China, it raised better projection for India supported by incremental trade volume, effective policy actions, stronger external buffers and tax reforms (GST).

But IMF also warned about India's subsidy wastage towards unproductive areas of the economy and instead advised the policy makers to give more focus on basic needs of the country like drinking water, education, health care and infrastructure.

After yesterday's "Diwali Gift" by the new RBI Gov/MPC, there is virtual nil probability of a "Santa Claus Gift" again in Dec and RBI may now only act on Feb'17, depending upon the actual trajectory of CPI in the months ahead (Sep'16-Jan'17 average CPI). It’s very rare for RBI to indulge in successive policy rate cut/action in two consecutive meetings. In that scenario, for the short term, we are very near to the bottom of rate cut cycle also.

Among various points of RBI policy yesterday, one notable thing was lowering of real rate of interest/neutral rate (RRI) to 1.25% from the previous 1.50% under Gov Rajan. As par some analysts, this may be even lowered to 1% considering the negative bond yields & NRIP scenario globally.

RBI, also projected an CPI range of 4-4.5% in 2017-18 and in that scenario, repo rate may come down further towards 5.75-5.25% range in FY:17-18; i.e. still there may be further scope of 0.50-1.00% rate cuts in 2017-18 !!.

The lowering of RRI target by the new RBI Gov/MPC is significant because it may affect Indian bond market quite seriously and trusts of the FPIS may be also affected adversely.

Over the years, Rajan was so much favourite among the FIIS, primarily because of his "hawkish/owlish" stance on Indian economy, repo rates, inflation (price stability) and his effort for a stable/balanced currency (INR).

Thus, Indian bond market attracted much more inflows than the EQ market over the years and any abrupt attempt by the policy makers to weaken the INR by lowering the repo rate may cause huge capital outflow from the bond as well as the stock market and this was the primary concern behind "Rexit".

Indian market sentiment was further affected today after Nikkei India Service PMI (Sep) dipped to 52 from 54.7 (Aug), which may be an indication of  moderation of the service sector. Almost 50% of India's GDP may be from the service sector as its primarily a "service oriented economy".

Interestingly, World Bank reports that almost 69% & 77% of jobs may be affected due to increasing automation & artificial intelligence (AI).

Although, huge favourable/young demography may be an advantage for India, proper job creation for the vast work force entering the job market every month is much more vital as the economy is running almost by the "speed of a bullet train" as par official GDP data (tag of World's fastest growing economy).

Although, RBI's repo rate cut of 1.75% (for last two years or so) has good effect on the bond market, where cost of borrowing is down by almost 0.50%, there is negligible effect on the bank lending rate.

Top grade corporates has no problem from borrowing from the bond market or from overseas by way of different routes (QIP/FCNB etc) without going to the Indian banks.

But, for small business/MSME sector, the viable option may be only banks and unless & until banks lower their effective lending rate significantly, viability of doing business with bank funding in India may be quite bleak.

Thus, unless & until, MSME sector revives, there may be very little hope for an overall economic recovery, which is still elusive for the last few years despite various "green shoots".

For effective rate cut transmission by the banks, small & fixed deposit rates may need to go much more lower  and for that we need some structural reforms along with political will, which may not be possible in the foreseeable future.

Another factor is that only domestic demand may be not sufficient; India need to export much more and unless & until, there is some "green shoots" on the export front, capacity utilization & private capex continue to be bleak.  

Nifty was today supported by HUL, Asian Paints, LT and dragged by ONGC (stake buy news from its Russian partner), Axis Bank, Bajaj Auto, M&M and Hero Motors.