Nifty Closed The Nov Exp Down By Over 8% Amid Strong USD, Concerns Of Slower Economic Activity & Political Chaos For Demonetization And Lingering Tensions At LOC---What’s Next For Dec Series ?

Technically, consecutive closing (at least 3-5 days) below 7900 zone, NF may fall towards 7645-7440 & 7350-7230 area.

Change in overall downtrend may happen by only consistent closing above 8080-8170 area for rebound towards 8270-8350 & 8475-8625 zone.

Market Wrap: 24/11/2016 (17:30)

Nifty Fut (Nov) closed today around 7965 (-60 points), almost 0.74% lower for the day marked by some late Exp day volatility after a session high of 8019 and opening session low of 7947. 

With today’s closing, Nifty has lost over 8% for the Nov Exp series marked by global headwinds of strong USD as a result of hawkish Fed and “Trumponomics” (US election outcome) and domestic concerns of slowing economic activity, weak GDP & H2 FY-17 earnings because of short term business disruptions as a result of poorly implemented demonetization.

The overall sentiment of the Indian market may be also affecting due to long term collateral damage on the consumption story of Indian economy as a result of “surgical strike” on the “black/unaccounted money” and consistent resolution by the Govt for more such “attacks” in the near future. Indian economy is primarily based on domestic consumption and not on exports. Traditionally, the significant part of this consumption is dependent on “cash/parallel/informal economy” or “graft/unaccounted money”. 

The sentiment of the domestic market may also be affected today after some unusual “hard” criticism by the “soft spoken” former PM in the RS today. MMS today termed the current demonetization by NAMO as “monumental mismanagement” and “organized loot & legalized plunder”. He also raised concern that this demonetization led chaos & business disruptions may bring the country’s GDP by around 2% lower in the coming days.

Being an eminent economist himself and one of the prime architect of India’s economic reform, the comments of the former PM may matters to the market.

There is no doubt about short term business disruptions and its effect on the GDP as the Govt as well as various analysts are projecting at least 0.5-2% negative effect and H2FY17 earnings may be also revised by 5% downgrade. But, beyond short term, public trust on Indian currency & banking system may also be affected as a result of this demonetization as pointed out by the former PM.

Domestic market sentiment are also affecting by the continuous strength in USDINR, especially after “Trumpism”. USDINR-I touched record high of around 68.83 today after FOMC minutes show confidence about rate hike in the near term. Although, Dec’16 Fed rate hike of 0.25% may be already discounted by the market, Fed may take more hawkish stance in the months ahead and may hike 2-3 times in 2017 against earlier perception of only 1 yearly hike. The basics of “Trumponomics” and more fiscal spending towards infrastructure, start ups & job creation may spur inflation, which may prompt Fed for more rapid rate hikes; although the source of funding for such huge spending of $1 tln over next 10 years are still unknown (Fed’s “free money” & Private investments ??).

Thus, the divergent monetary policy between Fed & other G-20 economies are causing USD stronger, making EM currencies extremely vulnerable. The divergence between US & Indian bond yields has also increased significantly in the last few weeks as a result of demonetization and hopes of further RBI rate cuts, which is making USDINR more strength and in such scenario, it may rally further towards 71 area.

Although, RBI intervened today in the FX market to save INR and the FM has also indicated that RBI will protect the INR more vigorously, if it breaches 69 level, the continuous fund out flow by the FPI (s) led selling in bond & EQ market and the huge expected redemption of around $16 bln (with FCCB worth $1 bln) in the coming days may put more pressure on the INR.

After the current demonetization and overnight surge in CASA, banks are rapidly lowering both deposit & lending rates. Market is also expecting 0.25-0.50% repo rate cut by the RBI, in its Dec-7^th monetary policy (at least 0.25% rate cut may be already discounted by the market).

But, bank lending rates (MCLR) is dependent on many factors like overall liquidity in the system, bond markets beside RBI repo rate. As current liquidity is excellent, banks are cutting rates across the board. Till then, overall banks may have transmitted around 1-1.15% of the previous 1.75% rate cuts by the RBI. Going forward, it may be tough for the banks to cut or transmit further as general FD & small savings rate is higher in India and drastic cut in savings rate may be also not possible here for various political compulsions.

RBI may also be on the side line with an accommodative (owlish) stance in Dec’16 as more repo rate cuts may also cause incremental divergence between US & India bond yields and interest rate differentials, which may make USDINR more strong and further FPI out flows. 

Also, there is no significant demand for credit as a result of pain of “twin balance sheets” and tepid private investment cycles. The current demonetization may also affect cash flow and real estate prices significantly (already 30-40% down), which in turn may affect also the retail as well as commercial NPA/NPL of the Indian banks. in the short term. 

Inflation, especially the food inflation may have already spiked due to demand supply mismatch as a result of the cash crunch on the ground. Thus RBI may be in the “wait & watch” mode till Feb’17 and depending on the overall scenario, like Fed’s guidance of future rate hikes, domestic inflation trajectory may cut by another 0.25%. 

Another point is that after “Brexit & “Trumpism”, political risks and nationalism is on the rise across EU and other developed nations, which may prompt policy makers & politicians for more fiscal spending towards “Real Street” rather than monetary stimulus for the “Wall Street”. 

Thus, days of easy money policy may be over for the EM (s) and we may see more fund-out flows and India may not be an exception despite being a “sweet spot” in the global economy with its appeal of 4-D (democracy, demography, development & demand).

The last D (demand) may be significantly affected due to the current demonetization in the short term and “war on black money” in the long term. It may take at least 5 more years for the cycle to be complete and till then the much expected recovery in earnings may also be an illusion.

Although, the Govt is “committed” for the April’17 roll out of the GST, it may also be an illusion in the current political backdrop, budget preparations as well as the demonetization led chaos on the ground and the overall situation is not helpful and in that scenario, it may even tough for the Govt to implement it from Sep’17 as there will be number of state elections. 

Eventually, Govt may decide to roll out the GST after 2019 general election as from 2018, preparation for the same (election) may start & BJP/RSS may not take risk of another political blunder in the form of business disruptions and effect on inflation on the public for the GST. 

Thus, in the process of current wash out of the parliament (most likely) led by the united oppositions, no one can also blame the Govt for failure to implement the GST from April’17. Eventually, GST & other important reform (land & labour) process may continue to be a political game of “ping pong” in the country.

Another risk for the Indian market may be the ongoing “tensions” at LOC (Pak) in J&K, where a “virtual war” may be happening for the last few weeks after India carried a “surgical strike” at POK. The current “mini war” like situation may turn into serious warfare at any point of time because of domestic & political compulsions of the both sides. 

NAMO may have done the biggest political & economical blunder of his life by this sudden decision of demonetization as 85% replacement of currency notes in a cash economy may not be possible overnight (2-3 days) as initially announced by him. It may  be done by another 50 days as later assured by him, but the collateral damage already done to the vast (99%) populations of the country having little co-relation with the so called “black money” may be irreversible. 

As par various estimates, around 6% of the so called “black money” may be trashed into cash/old currency notes and the rest has already converted into other forms of financial assets like gold, real estates, EQ etc. Also there are many loopholes available in our system to bypass this demonetization directly with exchange of currency notes at the banks and convert it with other means by paying 20-40% “premium” against surrender to the Govt/Banks with a 60% “loss” along with risk of “prosecution”.

Thus, the intention of “war against black money” by NAMO is beyond any question, but the process & implementation may be questionable. The sudden “surgical strike” on the “black money” & demonetization may be carried out after putting the system/infrastructure in place like digital economy, acceptance of cards in every business points etc. Also the new 500 & 2000 notes may be compatible with the old 500 & 1000 notes to avoid the lengthy ATM recalibration works and there should be more stocks or supplies of 100 notes to avert a riot like situation on the streets.

Another point is that, rather than sudden demonetization, where overall costs & collateral damage may be more than the intended benefit, “surgery” should have done on the actual causes of the “black money” (like rampant corruption in public as well as private places and tax reforms). 

Most of the Indian professionals & small business has not reported their full income due to high tax incidence in the country. Similar is true for the real estate transactions, where even “political black money” is involved. Thus urgent tax reform may be the need of the hour, despite it may be a legacy issue as India is a high cost economy. Otherwise, the generation of “unaccounted” money may not be stopped and on the other side, a business & profession may no9t be viable at all after paying full taxes.

But considering the overall scenario of the fiscal deficit combined for both centre & the states, the required tax reforms may also be an illusion. The proposed multiple GST rates are also high as states are not ready for any compromise on the overall revenue.

Thus, in this demonetization fiasco, big fish may have already escaped, but the vast ordinary poor & uneducated citizens, having little digital technology are suffering immensely without any fault of their own, which may put NAMO into a more serious political risk in 2019 general election. 

In 2014, NAMO came to power on the basis of a strong leader unlike his predecessor (puppet??) and on the perception of crusade against corruptions and more development & employment. Now, the apparent lack of employment may have forced NAMO to play the “corruption” card ahead of series of state and general election. But the poor implementation of this “corruption” card (demonetization) intended for the “poor” may backfire in the days ahead.

In that scenario of political risk in India, Nifty may be even breach 6800 level for the 6300 zone, from where this 2-nd leg of this  “NAMO Rally” has started.

SGX-NF