Nifty Closed Almost Flat Amid Some Short Covering As RBI Projected Better Than Expected GVA Growth For FY-17 & 18 Despite Its “Hawkish Hold” & “Neutral” Stance

Market Wrap: 08/02/2017 (19:00)

Looking at the chart, Nifty Fut (Feb @8803) has to sustain over 8855 area for further rally towards 8900-8950 & 8995-9075 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8835 zone, NF may fall towards 8760-8725 & 8675-8590/8565 area in the near term (under bear case scenario).

Nifty Fut (Feb) today closed around 8803 (+18 points) after making a session low 8732 soon after the RBI announcement and a closing minutes high of 8814. Nifty and Bank Nifty, both closed flat as RBI projected better than expected GVA growth for FY-17 & 18 despite surprised hold today along with a hawkish & neutral stance from previous accommodative bias. As there was limited time for the market to gauge the impact of today’s RBI monetary policy and its sudden change of long term accommodative stance since Jan’2015, market may react in the days ahead as for 2017-18, all hopes of future rate cuts by RBI may have actually doomed.

Market may be expecting a tepid GVA forecast by RBI this time around of 6.5% & 7% for FY-17 & 18 in line with Govt’s budget projection; but RBI came with 6.9% & 7.4% projected GVA for the same and this may be the primary reason for some short covering at the closing market hours. RBI is expecting faster recovery of the economy in FY-18 after demonetization & subsequent remonetization contrary to earlier muted perceptions.

Although, most of the economists had predicted a 0.25% rate cut this time along with another 0.25% cut in H2FY18, citing favourable macroeconomic environment and USDINR equation to kick start the economy after demonetization blues, some of the analysts has also predicted no rate cut this time citing sticky core inflation and rising commodity prices, specially oil. 

Another logic may be that, banks are already flushed with excess low cost demonetized funds and have already lowered their MCLR significantly post demonetization and in that scenario, there may not be enough room for the banks to cut rates further, even if RBI cut today or further in 2017-18, unless small savings deposit rates in India fall drastically. As of now, drastic cut in small savings rate is not possible by the Govt as its involved almost all the “Aam Admi” of the nation and may be a another political suicide after demonetization. Thus, in that sense any RBI repo rate cut may be a waste till banks have sufficient room for more rate cut transmissions. Apart from high savings rate in India, resolution of NPA may be also vital for the banks to sacrifice some of their high NIM and transmit more to the borrowers.

RBI today also raised the issue of incomplete transmissions of earlier repo rate cuts (1.75% from Jan’15 to Oct’16) by most of the banks despite steep cut of MCLR in Jan’17 following NAMO’s year end message. If today RBI slashed repo rate by 0.25%, banks may have benefited by some incremental addition in their NIM and G-SEC portfolio holdings (bond prices crashed after RBI hold today). 

Although, after demonetization led easy liquidity for the banks, there are no scarcity of funds to lend at affordable NIM and in that sense, banks need not to borrow from the repo window of the RBI at comparatively higher rates (6.25% at present), the main issue may be that there is severe lack of “quality borrowers” and demand of credit, specially corporate/MSME. Instead, RBI preferred to keep the INR as strong by not cutting rates further and thus helped the Indian bond yields (G-SECS) to jump, which is more important for the angel investors (FPIS) in the backdrop of surging US bond yields; otherwise any drastic repo rate cuts may result in another bond market blood bath after the recent crash as a fall out of demonetization (banks rushed to buy G-SECS to cover the statutory SLR, which caused the bond yields plummeted in Nov-Dec’16).

Another reason for the short covering today may be that from mid Feb to March end, restrictions of cash withdrawals will be completely withdrawn in phases from the savings accounts and in that scenario, market is expecting a normal full remonetized economy. 

But still, as of now almost 25% of the ATMS are not working at a time as various withdrawal restrictions were eased recently and people are withdrawing cash in large amounts. Govt may have only remonetized around 70% of the returned demonetized currency notes (i.e. around Rs.10 trln out of 15 trln) and as such, there may be some permanent issues with the cash economy of India as despite best efforts for a digital economy, most of the people are not tech/net savvy and still preferred cash over digital money for regular transactions, which is not black (unaccounted).

Also, the durability of the huge demonetized bank deposits will not be permanent and at some point of time it may revert by at least 40-50% and fate of the rest will depend upon the enforcing action by the Govt (IT/ED). It seems that after demonetization, black/unaccounted money has largely flown into the banking system defying earlier narratives and any significant amount of IDS collection from it may be quite challenging for the Govt, considering huge data and various legal hurdles. 

Also, most of the previously unaccounted demonetized bank depositors may have their satisfactory answer is ready, thanks to several loopholes in the system and as such market may be quite relieved that “all wealth is not lost” and it will eventually rebuild & redistribute itself. Thus, the great story of Indian consumption may not be hurt too much despite demonetization and Govt’s “surgical strike on the black money”. 

But, in this “war against the unaccounted money”, rebuilding & redistribution of the “lost wealth” may largely depend upon the future course of action by the Govt, like instant seizure/frozen of suspected accounts etc and other modes of “surgical strikes”. If it continues, then one can expect a much delayed recovery as Govt is repeatedly emphasizing that “by mere deposit of unaccounted money into bank accounts, it does not turn accounted, required tax & fine need to be also paid on that”. 

RBI is expecting rapid recovery in consumption & investment demand in FY-18, especially in cash intensive sectors such as retail trade, hotels, restaurants & transportation as well as informal unorganized sectors on the back of rapid remonetization and resumption of expected bank lending amid easy liquidity and lower rates (for healthy borrows having good CIBIL score !!). 

Also, incremental fiscal/infra/rural spending in the proposed FY-18 budget may boost rural economy and along with that affordable housing theme should contribute to the growth engine of the Indian economy. Thus, RBI projected a GVA of 7.4% for FY-18, despite sufficient uncertainties about demonetization and GST implementation.   

Thus, the ball may be in the PSB’s court now and for that, actual resolution of the huge stressed assets and rapid recapitalization of the public sector banks are necessary; otherwise, who will fund the “India growth” story? 

The present “Indradhanush” plan may be too little & too late and the budgeted amount of only Rs.10000 cr for FY-18 may not be sufficient (e.g. KFA alone owes more than Rs.9000 cr to the banking system and almost 15% of the bank loans may be presently stressed; i.e. around Rs.15 TLN). Clearly, Govt may be also looking for actual resolution of the stressed assets rather than any significant uptick in fresh credits from the banks and thus, probability of credit fuelled recovery for the Indian economy may be remote as of now; banks may not find sufficient “quality borrowers” in abundant to fund & kick start the economy.

  SGX-NF