Technically,
NF (8143) need to sustain above 8175-8210 zone for further rally towards 8260-8345
area; otherwise, this may be again proved as “dead cat bounce” and sustain
below 8130-8095 area , NF may fall towards 8075-7995 & 7960-7900 zone in
the near term.
Market Wrap: 28/11/2016
(17:30)
Nifty
Fut (Dec) today closed around 8143 (+17 points), almost flat (+0.21%) after a
volatile trading day, which saw an opening session low of 8088 and late hours
high of 8168.
Today
Indian market opened in negative tone following tepid global cues and another
fresh domestic headwind in which RBI decided to suck up the excess liquidity of
around Rs.3.24 lac cr from the Indian banking system after huge surge in demonetization
led deposits in old currency notes.
But,
soon after opening, domestic market covered some of shorts, especially in the
banking stocks and together with that some value buying or more short covering
in some of the leading FMCG, Pharma, Telecoms and cement stocks, which were
heavily beaten down in the last couple of trading sessions has helped the
market to end in a slight positive bias.
Although,
the surprise (?) CRR hike on the incremental demonetization deposits may be
negative for the bank stocks, as they are now not in a position to take the
advantage of taking deposits at lower rate (4%) and lend the same to RBI for
higher rate (6.2%) on this incremental deposit in the reverse repo window. As
most of the banks has already cut various deposit rates as well as MCLR (base
lending rate) assuming incremental flow of greater liquidity in the system at
lower cost as a result of demonetization led deposits, this weekend RBI move
can hurt their NIM.
On
the other side, some analysts are also seeing this RBI move to hike CRR by 100%
for the demonetization excess deposits as net positive for the banking sector
in the long term after the appropriate action by the Apex bank for financial
stability of the banking system.
The
perception is that after the announcement of the demonetization, there is huge
inflow of bank deposits, while very little withdrawals due to various reasons
and actual shortage of existing valid currency notes. Thus, banks are literally
sitting on huge deposits of around Rs.8 lakh cr as on last week. As par RBI
regulation, banks have to keep aside 4% of this as CRR and also have to buy
G-SECS (Govt bonds) for around 21%. The rest of the deposits can be used for
lending purpose.
Now,
the ground situation is that there is no real demand of credit as most of the
Indian corporates are already stressed and there is lack of adequate demand
with high rate of capacity un-utilization. The sudden “surgical strike” on the
black/unaccounted money may have helped to curtail that demand (consumption) by
at least 30-40% even in the long run. The demonetization led disruptions and
the resulting cash flow mismatch may have also dented the sentiment of the
MSME(s) and may have even affected the confidence of the retail borrowers.
Thus, in the near term there may be no takers of any loan even if banks
transmit a good portion of RBI rate cuts or RBI cuts more (growth in bank
lending may be muted going forward).
Also,
banks are now forcing to buy G-SECS on an incremental basis almost every day
for the 21% SLR requirement. This, in turn helping the bonds to rally and yields
were going down to an unrealistic level along with the surging US bond yields
as a result of “Trumpism” and hawkish Fed (strong USD).
Thus,
the attractiveness of the Indian bond yields are falling and FPI(s) are exiting
Indian market as it was an attractive destination for them in search of high
yields with a safety in the world of NIRP/ZIRP or Near Zero Interest policy (negative,
zero or slight positive yields for global bond markets). Incidentally, Rajan
was the “darling” for FII(s) for his hawkish stance and this positive Indian
bond yields.
Now,
the global, especially US bond yields are rising and if Indian bond yields kept
falling after demonetization, the situation may become worse. For an economy,
stability of bond market may be more important rather than stock market flows,
because it may be the prime funding source for Govt deficits & fiscal
spending.
Another
point may be that, actually, RBI is short of G-SECS against the deluge of
demonetization led deposits and thus sucking out part of it (for around Rs.3.25
lakh cr) is a right step as eventually, it can protect the banks from the huge
capital loss out of depreciation in G-SECS.
As
par some estimate, this absorption of liquidity may cost the banks around
Rs.700 cr as two weeks interest difference from reverse repo & deposits,
but at the same time it may protect them for a notional capital loss of Rs.50000
cr (assuming 2% loss on total SLR of the banks at around Rs.25 lakh cr on an
overall deposits of around Rs.100 lakh cr).
Thus
its prudent for the banks to take a much smaller interest loss now than to take
huge capital loss later as ultimately, the demonetization led excess deposits
may start to withdraw by a significant portion, when normalcy is expected to
return around Q4FY17.
As
par last week figure, the net surplus in demonetization led deposits may be
around Rs.5.3 lakh cr against available G-SECS of around Rs.7.5 lakh cr, that
RBI can offer to banks.
There
is also significant shortage of MSS bonds with RBI, but they have taken some
steps in this direction also today, although, in a very small amount compared
to the overall liquidity of the system.
Another
reason may be that because of huge liquidity in the system after
demonetization, USDINR is also appreciating as bond market is also assuming
prompt rate cut by the RBI. By this CRR action to suck up the excess liquidity
from the Indian banking system to keep it as “liquidity neutral” as par RBI monetary
policy, RBI may want to sent a signal to the market that it may not be in a
hurry to cut repo rates in Dec’16.
Thus,
in an uncertain economic environment after the demonetization, RBI may focus
more on the prudent risk management in the Indian banking system (financial
stability) and Fed’s actual rate action in Dec’16 along with any future guidance,
rather than a simple inflation/growth dynamics.
The
risk of a sharp GDP decline in the near term may prompt RBI to be on an accommodative
stance in the short term and may even indicate a rate cut of 0.25-0.50% in
Feb-Apr’17 & H2FY18, but in Dec’16, RBI may stand pat to wait for the
actual impact of demonetization on the broader economy, inflation curve and Fed’s
stance.
RBI
may give more focus on “productive & agri loans” (rural economy) by the
banks and full transmission of the previous rate cuts (1.75%) as there is no
lack of liquidity in the system, especially with the PSBS after the
demonetization.
As
hopes of any rate cut in Dec’16 has virtually doomed as a result of “Owlish”
Patel (RBI), banks and rate sensitive stocks may react more in the market,
which is already under tremendous pressure as a result of demonetization and declared
“war on black money”.
Globally,
US bond yields as well as US EQ market was under pressure as on weekend, there
was a report that some of the election losers including Clinton may go for a
recounting in some of the areas of recently concluded US elections. Although,
chances are very slim for an overturn of the US election result, some of the
tweets made by Trump in response to this overall recounting episodes and
winning of popular votes in favour of Clinton by more than 2 mln votes may have
made the market jittery about the mental stability of Trump as a US President.
Trump
tweeted that, Clinton received 3 mln illegal votes in an unprecedented manner
without any supporting proof as an incoming President which may be unheard in
US politics so far. His tweet about Castro after the death on weekend was also
a new low in US politics. Thus the present “Twitter Tantrum” from the
President-elect Trump may be seen as an act of immaturity/inexperience as a Political
leader and if such immaturity continues as “President” after taking charge of
the Oval office, it may cause significant disruptions in the US as well as
global financial markets, because market may assume that “President Trump” will
try to keep at least half of his election rhetoric as “Candidate Trump”.
Already, “America First” notion is taking its toll for the Indian IT companies
as they are taking more “Americans”, which may cost them incrementally higher.
In
the last few weeks the “Trump Tantrum” has caused significant melt down in the
EM currencies including India. Now, after taking charge, any immature “Twitter
Tantrum” may also cause more headwinds for the “risk assets”.
Global
market may also be on the edge this week with Italy & Austria are going for
referendum/poll and given the recent rise in nationalistic politics after “Brexit”
& “Trumpism”, EU politics, especially France (Frexit?) may also pose
greater risks for the global as well as the Indian market.
Thus,
global market, especially US market may correct significantly as a result of US
& EU political risks and hawkish Fed, despite talk of “Trumponomics”. Apart
from Dec’16 rate hike, Fed may guide at least two rate hikes in 2017 (June
& Dec).
Technically, SPF (2207)
need to sustain over 2215 for a near term target of 2235-2260; otherwise it
will come down again towards 2190-2145 in the days ahead.
SGX-NF
SPF
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