Nifty Closed In A Cautious Positive Tone (+0.26%) On The Back Of “Temporary” Relief For The FPIS Taxation Issues Ahead Of Deluge Of US Economic Data & Domestic Earnings & “Trump Day”

Market Wrap: 18/01/2017 (19:00)

Looking at the chart, Nifty Fut (Jan @8430) has to sustain over 8485-8510 area for further rally towards 8545-8585 & 8645-8685 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8460-8425 zone, NF may further fall towards 8360-8305 & 8235-8175 area in the near term (under bear case scenario).

Nifty Fut (Jan) today closed around 8430 (+21 points) after making an opening session high of 8469 and late day low of 8406.

Domestic market today opened in an upbeat mode following yesterday’s decision of the IT dept to keep on hold the recent controversial FPIS taxation issues, which may be amounted to double or even triple taxation, if implemented in the letter & spirit of the previous clarifications. Although the latest flip flops by the IT Dept in keeping abeyance its recent circular may bring some cheers with the FPIS/market, Govt need to adhere to a more consistent, fair & predictable tax regime for the “angel investors” and going forward, all eyes may be on the budget for any amendments in this legacy tax issues as its also involved the old & famous Vodafone taxation case.

Indian market is basically consolidating within a narrow range for the last few trading sessions after around 7% rally from the recent low on the back of some better than expected Q3FY17 earnings despite concerns of demonetization, better poll prospect of BJP in the coming state elections, especially in UP amid divided oppositions (SP) and hopes of further upbeat earnings in the coming days, a “dream budget” & RBI cut in Feb. Market may be looking for better earnings from some of the index pivotals like Axis Bank, Yes Bank, HDFC duo, Tata Steel etc and any disappointment there may cause some volatility; i.e. market now need some triggers and definitive fund flows in order to come out from the present narrow trading range on either side.

But at the same time, market may be also cautious about some ongoing global concerns (Brexit, Trump’s actual policy, strong USD & Oil, China jitters etc) along with domestic issues of slower economic activity, slow progress of GST on the ground & uncertainty about 2017 GST roll out & political disruptions.

Today Govt also announced some disinvestments of the five PSU general insurance companies from 100 to 75% by listing them which were also long awaited. This has also helped some listed insurance companies on the bourse today. But, going forward reactions from the worker’s trade unions for these PSU general insurance companies may also need to be watched and it may be a long journey to enlist them in the stock exchanges.

It’s now almost certain that RBI will cut by at least 0.25% on 8^th Feb, especially after huge MCLR cuts by the banks at one go following “rebukes” from the PM on his 31^st Dec speech to the nation. As par some reports, GDP in old series may be languishing around 4-4.5% after demonetization and RBI will certainly act this time by at least 0.25%, keeping in view the latest headline CPI for Dec (3.41%). 

For the last six months, India’s average headline CPI was around 4.46% against 5.47% sequentially. It was around 4.93% prior to Nov-Dec’16 sudden fall after demonetization led economic disruptions.

Although, theoretically there may be more room for further rate cuts by the RBI, if average CPI hovers around 3.5-4% in the coming months, but it may not be simple growth/inflation matrix this time. RBI may take some hawkish (owlish) stance going forward because of USDINR bond yield & interest rate differential issues. 

Any abrupt rate cuts by RBI in the coming months may cause USDINR more strength despite perception of incremental stock market inflows and FPIS may react adversely in the bond market. Stability of USDINR & the bond market may be more important for the RBI now after sudden demonetization decision. 

Also, food inflation may spike after Jan’17 on the back of supply chain related issues for the demonetization led acute cash crunch, especially in the rural & semi-urban areas and despite demonetization woes, India’s core CPI did not fall as expected, indicating spikes in RM costs. Thus RBI may be quite owlish (hawkish) in the coming days after the expected Feb’17 cut. Banks & market may be already discounted for the 0.25% RBI cut in Feb, considering the recent price action.

It’s also almost certain that after the recent steep MCLR cuts, banks will not pass the expected Feb’17 repo rate cut of 0.25% to its borrowers. As of now, bank’s average MCLR is now around 8% and base rate (PLR) is around 9.5% Banks may like to keep the spread between RBI repo rate (assuming 6% at Feb) and MCLR & PLR at present level. 

For banks, the MCLR will go below 8% only if interest on small savings deposit rates in India goes downwards, which is also hovering around 8% on an average. In a politically sensitive country like India, where there is also severe lack of social security for various legacy issues, it may be very tough for a drastic reduction in the corresponding small savings interest rates. If banks will offer its deposit rates well below the small savings rates, deposit will flow out of the banks. Thus, for further transmission of RBI repo rate cuts by the banks, small savings rate in India need to be slashed first; otherwise multiple rate cuts by the RBI may be of no use for the overall economy/industry (borrowers). 

Considering all these, RBI may cut by 0.25% in Feb and may also cut another 0.25% in H2FY17, depending upon the actual Fed stance, “Trumponomics”, (USDINR equation), actual trajectory of Indian GDP & CPI after demonetization in the coming months, effect of 7CPC & GST (if implemented) on the inflation etc. Thus rate cut cycle by the RBI may end at FY-18, unless Govt takes appropriate steps to reduce the corresponding small savings rate in India in the coming months. 

Having said that, it may be also not easy for any Govt to slash savings rate drastically, especially during several state elections in 2017-18 and also for the upcoming 2019 general election, preparation for which may have already started.

 SGX-NF