Nifty Closed The Day In A Negative Note After Sudden Late Day Basket Selling (?) Amid Concern Of “Uncertainty” In 2017

Market Wrap: 28/12/2016 (17:30)

Technically Nifty Fut (Dec @8034) has to sustain over 8085-8120 area for further rally towards 8160-8200 for tomorrow.

On the other side, sustaining below 8040-8000 zone, NF may further fall towards 7940-7890 by tomorrow (FNO Exp day).

Nifty Fut (Dec) today closed around 8034, almost flat (+0.03%), but well off the day high of 8100 in a late day probable “basket selling” by some institutions (almost 13 lakh NF sell around 14:09), most probably to realign their portfolio ahead of FNO Exp tomorrow and start of new CY. NF made a session low of around 8024 today in a matter of minutes after gyrating around the vital resistance zone of 8085-8120 for some time and unable to break the level of 8120.

Although, apparently there may not be any specific reason for such sudden late hours “basket selling”, we have to keep in mind that the yesterday’s bounce back in the market was itself a “short covering rally” on the basis of some tax reform talks by the Govt, which was already a known factor for the market also.

Looking ahead, market may look into actual announcements by the Govt/NAMO regarding further demonetization/remonetization steps after 31^st Dec’16, any announcement of “stimulus” on 2^nd Jan’17 at NAMO’s scheduled public meeting and other “selective leaks” about tax reforms in the forthcoming budget.

Indian market will also watch monthly auto sales, Mfg PMI and other high frequency economic data for Dec’16 to gauze the actual damage suffered by the economy and lower trajectory of Q3FY16 earnings & GDP as a direct impact of the unprecedented “reform” of demonetization. 

Indian Govt today appointed Viral Acharya, a NY based professor in economics as one of the Dy RBI Gov, who has expertise in NPA management and has also some flamboyancy and thoughts similar to Rajan. As par some analysts, Viral “knows the moral hazard of Govt guarantee in banks/PSBS and he may push for running PSBS in an efficient way”.

May be, market is concerned about another “deep surgery” like Rajan for the hidden stressed assets and thrust for actual resolution for the banks/PSBS rather than consistent “window dressing” of debt restructuring in different forms. Banks, specially PSBS was in good pressure today in the late day trading.

After sudden demonetization, SMES may be the worst affected much more than the big corporates, because the later are already digital. As a result of consistent cash crunch & cash flow mismatch, loan portfolio of the SMES may be in great stress; even personal loan delinquencies may rise after demonetization led economic disruptions.

Thus banks may be the biggest loser in this epic experiment of demonetization as they are unable to earn any significant on the huge demonetization deposits and more over, they have to pay the minimum 4% pa for such savings deposit and there is no fresh incremental demands of loans also. 

Moreover, operating costs of the banks may have increased significantly for the demonetization led cash & compliance management. Thus, NIM & earnings of the banks may be in “deep water” for Q3 as well as Q4FY16. 

Only “windfall gain” for the banks may be sudden spurt in loan/NPA repayments after demonetization in old notes for around Rs.66000 cr. But, this may also be treated as “black/unaccounted money” by the IT/ED later, where repayment was more than Rs.2.5 lakhs in old notes (cash) and there may also be some types of litigation.

Today Govt also notified an ordinance to give legality for the demonetization and limitations to further hold the old currency notes. This may be the last effort by the Govt, desperate for an “windfall gain” out of demonetization for a “special dividend” from the RBI to give “immediate stimulus” to the “Aam Admi” (JDY accounts having zero/nominal balance) by way of “farm loan waivers” or even by “direct deposits” (desi version of helicopter money).

Although, Gov (Patel) has clearly denied such possibility in the last RBI meet of an “windfall gain” out of “cosmetic treatment” of its balance sheet without any actual P/L effect, it’s interesting to see, what RBI can do this time to protect the independence & credibility of the institution by saying “no” on the face of the Govt. As former RBI Gov, Rajan emphasized in his farewell note, that RBI as an institution must have the ability to say “no” for any illogical demands, even from the Govt, investors may be now missing the “vocal” Rajan and feeling the actual pain of “Rexit”. A healthy central bank is essential for for a country's banking system and any attempt by the Govt to directly recapitalize the ailing PSBS from the coffers of the RBI may not be taken well by the investors (FPIS); bond market & INR may react adversely and EQ market may also follow that.

 NF