Nifty Fall By 76 Points Following Tepid Global Cues And Ongoing Domestic Concerns Of Economic & Political Disruptions Along With Renewed Concerns Of FPI Tax Issues

Market Wrap: 22/12/2016 (17:30)

Technically Nifty Fut (Dec @8005) has to sustain over 8075-8165 area for further rally towards 8210-8275 & 8315-8375 zone in the near term for any “Santa/NAV Rally”.

On the other side, sustaining below 7980-7900 zone, NF may further fall towards 7840-7790 & 7700-7645 area in the short term. 

Looking at the chart, 8200 zone may be now a big technical challenge for the NF and consecutive closing below that, it may fall towards 7525-7425 area by next few weeks, when volume (FII) return to the market.

Similarly, for BNF (LTP: 17946), consecutive closing below 18000 zone, it may fall towards 16365-15300 area in the next few months and present down trend may change only consistent closing above 18750-18850 zone.

Nifty Fut (Dec) today closed around 8005 (-0.94%) after an opening session high of 8067 and late day low of 7975 and thus fall by almost 272 points in the last seven trading sessions on the back of consistent selling by FII(s), although in a relatively light volume. 

Some of the FII selling may be related to profit booking and year end repatriation, but bulk of the rest may also be structural shift from EM to DM (US) amid strong USD, attraction of expected “Trumponomics” and growing domestic concerns of economic & earning slowdown and political disruptions due to demonetization, which may also derail the much awaited vital reform like GST.

Moreover, apart from the short term (6 months) effect of demonetization on the adverse effect on India’s cash economy, long term story of consumption may also be severely affected for the Govt’s stance of “war on black/unaccounted money”.

The destruction of “wealth” and rebuilding/redistribution of the same may take considerable time and the consumption/investment cycle may only start after 2019-20 and by then India’s political path may also be clear either for a more developed country or towards a more chaotic democracy.

The present demonetization fiasco is clearly taking a shape of intense political battle between two main national parties (BJP & Cong) for not only the 2017 series of state elections, but eyeing for the 2019 general election also. 

The “war of words” and various election rhetoric between NAMO & RAGA is now taking the centre stage at UP election battleground; but both of them may be well aware that  neither of them will eventually win in UP and perhaps, it is SP or even BSP, which may win the majority there. Despite that, all the current rhetoric and blame & counter blame game may be aimed at preparation for the ground of 2019 general election considering in mind that if the present demonetization saga ends in an eventual failure and cause more hardships to the common people & economic slowdown, NAMO will be in serious problem despite huge support base among salaried middle class and RAGA & Co may be the last laugh. 

Thus “political risk” for India in the coming years may be a real possibility, which may not only derail various reforms plan of the Govt including GST, but may also destabilize the whole economy & country and this may be the one of the reasons, why FPI(s) are exiting Indian bonds at record pace to the safely of US & other DM(s), despite being described as a “sweet spot” in the global economy.

Indian market sentiment may be further affected today after some reports of renewed concern about FPI(s) tax treatment for Vodafone like transfer of shares transactions, which may be quite confusing and may even attract double taxation, which may also spook the FPI(s) in the coming days.

Also, as par some reports, Jan-March’17 period may be the transition period of Ind-Maurititus DTAA and in that scenario, we may have lots of FPI (s) based selling in India.   

Since 9^th Nov’16, India has not only the double whammy of “Trumpism” & demonetization, but also a surprised hawkish Fed, which may hike thrice in 2017, depending upon the actual trajectory of “Trumponomics”. Although, there was visible FPI outflow even before outcome of US election as “fiscal spending” was the main election rhetoric more or less for both Trump & Clinton, the net outflow was accelerated after 1-st week of Nov as USD & US bond yields are getting stronger day by day.

As par some reports, total FPI(s) withdrawal from EM since “Trumpism” is around $18 bln in bonds & EQ and out of that, around 50% ($8.8 bln) are from India (EQ $2.85 bln & bond $5.95 bln). 

So, far DII(s) are equivalent buyers of FII(s) selling, but going forward, DII(s) may also go slow as retail participation sentiment & consequent MF flow may be severely affected due to demonetization & “surgical strike on black money”.

Also, as par some reports, Govt/NAMO may shortly (on 2^nd Jan’17) announce some “big stimulus” in the form of direct taxes and some “Santa Gift” to the “Aam Admi” in the form of farm loan waiver and even transferring some demonetized funds to the zero balance PMJDY bank accounts to reduce the “short term pain” due to demonetization led chaos.

But, eventually any “Rabin hood” like approach by the Govt/NAMO may be counterproductive and may also invite various legal challenges apart from the apprehension of populist measures by the Govt ahead of series of state election, which may also be interpreted as “fiscally loose”. India’s combined fiscal deficit math may also be in jeopardy as a result of decreasing revenues and increasing “stimulus” (desi version of “Helicopter Money”).

Incidentally, Bitcoin may be the biggest beneficiary of India’s “war against unaccounted money” this month, appreciating by nearly 18% along with China’s outflow pains and some global flow towards “safety”.

Looking ahead, domestic market will look into the GST meeting currently going on till tomorrow; although there is virtually no hope for any political & administrative consensus this time and also subsequent April’17 roll out, Govt may finally announce that next date may be Sep’17, considering it as “constitutional compulsion”. But, eventually, “political compulsion” may take the GST implementation date after only 2019 general election and also Indian economy may not withstand two successive disruptions both for demonetization & GST.

Indian market may not be yet discounted for a GST after 2019 general election, depending upon the political outcome.

 SGX-NF