Nifty Well Of The Day’s High Amid Flat Global Cues And Closed In A Cautious Tone Ahead Of RBI Policy Tomorrow

Market Wrap: 06/12/2016 (17:30)

Technically Nifty Fut (Dec) now (LTP: 8164) has to sustain over 8195-8225 area for further rally towards 8275-8330 & 8395-8430 Zone.

On the other side, sustaining below 8155-8125 zone, NF may further fall towards 8085-8040 & 7980-7890 area in the near term.

Nifty Fut (Dec) today closed around 8164, almost flat after making a mid day high of around 8209 and closing session low of 8157. The opening minutes high of 8219 may be an act of “fat finger”.

Indian market today opened also almost flat following neutral global cues; but hopes of RBI rate cuts and other liquidity adjustment probability (CRR) has caused some rally, especially in the PSBS and some selective private banks (combination of short covering and some value buying ?). Again, towards closing session, market might take some caution as in reality, RBI may stand pat tomorrow or even if it cut 0.25%, that may have been already discounted by the market.

Market is expecting that RBI may cut 0.25-0.50% along with reduction in the CRR to normal level for the excess demonetization banking liquidity. Although, it’s very rare for the RBI to cut policy rates in two consecutive meetings in a normal circumstances, the present situation of the economy after the demonetization led crisis is not normal at all and considering the downside risks of near term growth (GDP) and lower core inflation trajectory, market is assuming that RBI may cut by 0.25-0.50% tomorrow.

But, it may not be a simple inflation vs growth play for the RBI this time; it may look another angle for USDINR equation. Any abrupt cut in repo rate with a more dovish tone accompanied with normal CRR may make the G-SEC bond yields lower, thus paving the exit route of FPI(s) easier and INR may also fall due to US-IND bond yield & interest rate differentials. Moreover, a weak INR may also accelerate EQ & Bond markets selling by the FPI(s).

Another point is that, even if RBI cut tomorrow, it may only help banks temporarily for the NIM as they have already transmitted/lowered their MCLR after demonetization surge in banking liquidity. Banks will not probably transmit any additional cut by the RBI at this point of time as there is no great demand for credits as well. 

After demonetization led economic disruptions, Indian consumption story is already very tepid as of now and going forward, Govt’s stance of “war on black money” may be another reason for long term slack on the economy. As there is no significant consumer demand, mere lowering of lending rate may not translate any vicious cycle of investment & spending and kick start of the economy, at least in the near term. 

Also, if RBI chooses to reduce the CRR for the excess banking deposits, then it may be even more negative for the banks as well as the economy/market. In that scenario, Banks has to park at least 21% of SLR requirements by investing into G-SECS Bonds, which may also cause massive fall in bond yields, paving the way for INR depreciation and FPI (s) outflow, beside probable capital loss of banks for their bond portfolios. But a normal CRR for the excess demonetization may help the banks for the lost interest which is already being paid by them to the depositors.

Thus, irrespective of RBI cut or no cut tomorrow, market may fall as it has been already rallied for the rate cut hopes and even if there will be 0.25-0.50% rate cuts, market may give a whipsaw rally, but ultimately, those incremental rate cuts may not be transmitted at all by the banks and there will be no utility as well for the economy. Moreover, fall of Indian bond yields as a result of any drastic RBI rate cuts may also make INR weaker, which is also not good for the Indian economy as it is largely import oriented. Banks can’t transmit any further incremental RBI cuts, if the small savings rates in India are not lowered drastically, which is also a very tough political decision.

Market may be relieved to some extent as almost 85% of the so called HDCN has entered into the banking system and by Dec end, more than 100% may be deposited with the banks (including unaccounted money and counterfeit notes of HDCN?)!!.

Thus, market may be assuming that there is no great loss of “wealth” and eventually it will return to the formal/informal economy, even after paying the required 50% tax. But, after the winter session of the Parliament ends, Govt may also announce some more restrictions for withdrawals in the suspicious bank accounts deposits to extend the present “war on black money” to a logical end along with other measures like “surgical strike” on gold, real estates and other financial assets. 

As most of the old HDCN are being deposited with the banks courtesy various loopholes & exemptions and VDS contrary to the earlier perception of “wind fall gain”, Govt may find it tough to justify the “gain” against the “pain” of the public for this whole idea of the demonetization to face the coming state elections.

Thus overall collateral damage for the economy may be more than the expected benefit for this demonetization & “surgical strike on the black money”. The root cause of the “black/unaccounted money” should have been put under “surgery” first rather than the “symptoms/organs”.

Govt perhaps need to do first the job of tax reforms with reasonable rates, fewer exemptions and less Governance to wipe out the basic causes of graft & black money creations. Even, the process of exchanging old HDCN from the banks are inviting massive corruptions and more over various rules & regulations in the IT Dept are also increasing their discretionary power, paving the way for more future corruptions (more governance, more corruptions).

Globally, all eyes will be on the ECB (8^th Dec), OPEC meets tomorrow and developments in Italy.

Yesterday’s record high OPEC production figure may be an indication that in reality supply gluts in oil may remain in 2017 too, despite some production cut agreements. Moreover, making agreement is one thing and implementation of the same is another thing, keeping in mind past fragile records of the OPEC members.

In Italy, where banking NPA is now around $352 bln, the most fragile bank (Monte Paschi) may face some tough times in the weekend, if a $5 bln bailout package is not worked out in the next few days. Thus, Italy may be falling fast into a full blown serious political as well as banking crisis in the coming days, despite market ignored the referendum result yesterday.

The impending political & banking crisis may also force ECB/Draghi to continue its dovish monetary policy in the foreseeable future as Govt may be also scared for a fiscal/structural stimulus like “Trumponomics”. On the other hand, Fed is prepared to hike in Dec’16 and most probably will also hike at least twice in 2017. Thus, the divergent monetary policy between Fed & ECB may make USD more stronger across the board (DXY) and in that scenario, USDINR may gain more strength in the coming days,, if RBI choose an extremely dovish path. A strong USD may ensure more FPI(s) outflows and subsequent selling in Indian EQ & Bond markets, beside collateral damage to the economy.