Market Wrap: 05/01/2017 (17:30)
Looking at
the chart, Nifty Fut (Jan @8287) has to sustain over 8310-8335 area for further
rally towards 8375-8410 & 8485-8545 zone in the short term (under bullish
case scenario).
On the other
side, sustaining below 8270-8240 zone, NF may further fall towards 8180-8140
& 8100-8040 area in the near term (under bear case scenario).
Nifty Fut (Jan) today closed around 8287 (+83
points) after making a late day high of 8299 and opening session low of 8236.
Indian market today opened in a positive note
after some fall in USD/US bond yields following overnight FOMC minutes (Dec),
which reveals “less hawkish” stance by different members of Fed and concern of
a stronger USD & rapid borrowing costs for the US economy.
In brief, Fed will be both economic data & “Trump”
dependent in its approach to handle the US rate hiking cycle in 2017 and
depending upon the actual strength of US economy (employment, GDP growth,
inflation trajectory etc) and fiscal plan & implementation of Trump, Fed
may “gradually” hike rates in 2017 by either thrice or twice.
As a result, both US bond yields & USD dropped
across the board. USDCNY also crashed considerably to 6.78 from the recent high
of 6.98 (-1.4%) after some PBOC steps of capital control (outflow) and demands
of Yuan ahead of forthcoming lunar holiday season in China.
Along with the weak USD, domestic market sentiment
may be also boosted today by FM’s comments that actual FY-17 tax revenue collection
may exceed the budget estimates and as such, market is assuming that Govt will
be able to keep the projected fiscal deficit at 3.5% of the GDP for the FY-17;
adherence of the fiscal discipline in the last year’s budget was one of the
reason for huge post-budget rally.
Apart from adherence of fiscal discipline even
after incremental capex & other social expenditure by the Govt, market may
be also looking for some kind of “windfall gain” from the demonetization
exercise.
Originally, Govt was expecting somewhat around 5
lakh cr of such “windfall gain” or “special dividend” from the RBI, out of extinguished
old currency notes (SBCN not returned to the banking system).
But, eventually now after nearly all (97%) the
SBCN(s) has returned to the banks, some analysts are projecting around 50000 cr
(against previous estimates of 1 lakh cr) as “special dividend” from the RBI
and another 1 lakh cr (approx) from IDS-II (demonetization led IT disclosure). Thus,
Govt may now get “windfall gain” of around 1.5 lakh cr from the demonetization,
which may be used as “stimulus/helicopter money” in the forthcoming FY-18
budget.
Although, RBI is again calculating (reconciling)
all the returned SBCN(s) to “double check” any “wrong entry” and eventually may
announce slightly different figure; it has repeatedly denied any possibility of
any “special dividend” out of demonetization till now as it will neither reduce
their balance sheet liabilities or affect any P/L account.
But, after Govt’s ordinance related to SBCN, even
if liability side is extinguished to the proportion of old notes not returned
to the banks, still it will not affect the RBI P/L account and as such for any “forced
special dividend”, RBI has to liquidate some of its assets like GSECS or FX
reserve in the market, which may also be next to impossible & absurd.
RBI earned by repo & reverse repo differential
to banks and buying & selling difference in GSECS & FX/USD and out of
that profit, transfers certain amount to the Govt as “regular dividend”. RBI
may eventually, transfer more such “regular dividend” to the Govt in lieu of a onetime
“special dividend” as Govt also need funds (revenues) for PSBS recapitalization
& other capex/social expenditure desperately.
For IDS-II assumption of Rs.1 lakh cr, it may take
significant time and effort on the part of the Govt/IT to shell out such amount
from the IT seizers as various administrative & legal hurdles will also be
there.
Market may be taking some solaces that as almost
all the SBCN(s) has returned to the banking system, it will be eventually not
destroyed and there will be gradual redistribution or rebuilding of “wealth”
and Indian consumption may also be gradually restored in the coming days.
But, as Govt has already said that by simple depositing
“black money” into one’s accounts or other’s accounts, it will be not
automatically “white” and for that one needs to pay the required income tax on
it. As par some report, more than 50% of the demonetized deposits for around
Rs.7 lakh cr is suspected to be “black/unaccounted money” in nearly 64 laks
bank accounts (??).
Considering the current manpower of the IT and its
technological innovations, it may take at least five more years to yield some
taxes out of such huge suspected demonetized bank deposits. Thus, Govt may put
some withdrawal restrictions from the bank accounts, suspected for money
laundering or even consider some types of BTT in the forthcoming budget.
Eventually, redistribution or rebuilding of “wealth/black
money” may take several years and until then, Indian consumption & consumer
confidence may remain very tepid.
Now, after 2 months, acute cash crunch may be receding
in metro areas and gradually, cash flow to the rural & semi-urban areas
should improve, but it may take more time for the revival of stability in the
supply chain and till that, PMI may also be in the contraction zone as of now.
The real pain or gain of demonetization may be felt only after 3-6 months after
initial disruptions.
SGX-NF
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