Nifty Closed Almost Flat; But Off The Day’s High As Market Took A Breather To Digest Yesterday’s Budget And More Q3 Earning Cues Ahead Of RBI Policy Next Week Amid Mixed Auto Sales & PMI Data For Jan’17

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

Looking at the chart, Nifty Fut (Feb @8731) has to sustain over 8800 area for further rally towards 8855-8895 & 8950-8995 zone in the short term (under bullish case scenario).

On the other side, sustaining below 8775 zone, NF may fall towards 8725-8675 & 8605-8545 area in the near term (under bear case scenario).

Nifty Fut (Feb) today closed around 8731 (-7 points), almost flat, but off the day’s high after a moderate day of volatility. NF made a day high of 8773.80 and a session low of 8697.30 in a day of consolidation supported by IT, Pharma Telecoms; but dragged by Autos, Cements.

Today market was mainly supported by IT as some reports, close to Trump’s team claimed that no executive order is on the agenda for Trump to invoke the H1B Visa issues immediately; i.e. it may be go through the usual approval mechanism for the US congress and thus chances of getting it passed may be remote, considering the hard lobbying by the Indian counterparts. 

But, going by the uncertain nature & “America First” rhetoric of Trump, it may be of not much surprise, if he prefers a swift action.  As par some reports, Trump team is weighing any possibility of IT disruption for restructuring of the H1B Visa rules in US and accordingly he may take his own time/decision. Thus, a wave of uncertainty is still there for the Indian IT outsourcing companies, not only for US politics, but also for looming threat of “Real Brexit” and lack of timely adaption of automation (AI) & digital technology.

As par some market buzz (HOS), Infy may announce Rs.10000 cr share buyback shortly and that may be another reason for its 2% rally today.

Apart from digesting more fine prints of yesterday’s budget, Indian market may be also turning cautious amid mixed auto sales, PMI figure and Q3 earnings ahead of RBI next week.

It’s now almost certain that RBI may cut by 0.25% in its policy review meeting on 8^th Feb, following Govt’s projected fiscal deficit figure of 3.2% and lower borrowing programme for FY-18. Also, the recent Trump Tantrum is causing the USD to go lower and Fed is also turning cautious /dovish about impact of a stronger USD on the overall US economy. Thus, under this favourable scenario, RBI may cut by 0.25% to bring the repo rate to 6% and also there may not be any incremental pressure on the banks to reduce their MCLR proportionately as banks have already lowered their MCLR significantly at one go after getting some “scold” from NAMO in his year-end address to the nation. 

Going forward, RBI may be on hold till Oct’17 to wait for actual impact of the demonetization on the overall economy & inflation trajectory, July-Sep’17 implementation of GST (?) and any real progress of “Trumponomics” & actual Fed stance and depending upon the evolving favourable scenario, may cut by another 0.25%. 

Banks, on the other hand need to lower their actual effective lending rates (base rate/PLR) to the borrowers to transmit benefit of lower interest rate to the economy. In India, if one considers the average PLR/effective lending rate with average WPI or even CPI, the real rate of interest is still considerably high compared to its counterparts in other parts of the world (DM/China & other Asian countries) and that may be one of primary reasons for the huge NPA/NPL in the Indian banking system; i.e. it’s a legacy issue.

Indian market, specially the Bank Nifty may be already discounted by a large extent for the 0.25% RBI rate cut next week; also yesterday’s budget proposal for more tax cuts for the NPA provision has helped the banks significantly. But, Govt’s proposal to recapitalize the PSB in FY-18 by a mere Rs.10000 cr may be negative for the PSBS as minimum Rs.1.5 trln may be required for BASEL-III compliant against Govt’s overall ‘Indradhanush” commitment of Rs.0.70 trln (although Govt is ready to help PSBS on a case to case basis, if there is any real requirement from them).

Globally, after today’s BOE meet in which they seemed to be on the “dovish” side, despite upbeat UK economic projections, all eyes will be on the UK PM for her “white paper” release about further specific timelines for “Real Brexit”. As UK Govt yesterday was able to pass its Article-50 invocation bill without much opposition, it will be mere formality for its final passage scheduled for next week. Thus, by March’17, UK may officially start it Brexit negotiations after invocation of Article-50 on 9^th March (?) and if it’s going to be “Hard Brexit”, it may be also bad for the EU concept itself.

Thus, US & EU political risks, Trump’s trade protection, border tax & “America First” rhetoric may be some of the headwinds, which global as well as Indian market may face in the coming months.

After digesting FY-18 budget, RBI policy, Q3FY17 earnings, Indian market may also focus on the forthcoming series of state elections to gauze the actual approval rating of NAMO after demonetization and an “Aam Admi” like budget approach (pro-poor, pro-farmer, pro-SME, pro-rural, pro-middle class aiming for not the state elections, but also for the crucial 2019 general election). 

Despite credible “fiscal deficit” figure, Indian economy may be turning fast into an “employment deficit” state and that may be the biggest challenge in 2019 general election for NAMO. Although there is no visibility of any “credible” opposition leader as of now (despite RAGA is “working” very hard), for an “Aam Admi”, GDP growth, fiscal deficit & other macros are meaningless, unless he/she is able to get a reflection of better macros in his/her own earnings.

 BNF