Nifty Closed Almost Flat In Another Day Of Consolidation Helped By Positive Global Cues & Exporters; But Dragged By Rate Sensitive Stocks After “Hawkish Hold” By RBI

Looking at the chart, Nifty Fut (Feb @8805) 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 8785-8715 & 8675-8605 area in the near term (under bear case scenario).

Nifty Fut (Feb) today closed around 8805 (+9 points), almost flat, after trading most of the days in negative; NF made an opening session high of 8843.80 & a day low of 8733 after a modest day of volatility.

Indian market today opened in positive tone helped by upbeat global cues (rebound of EU & EM and also US bond yields) & strong INR after RBI stayed pat with neutral stance unexpectedly yesterday, causing Indian bond yields to surge most in the recent past. Domestic market was also helped today by IT (TCS/INFY/Wipro/TECHM), Telecoms (Infratel, Bharti Airtel & Idea) And RIL; but dragged to some extent by rate sensitive stocks (Banks & infra, Autos) after yesterday’s “Hawkish Hold” by RBI and mixed auto sales data for Jan’17 as released by SIAM today (although PV sales jumped, other category of auto sales were quite tepid in the last month).

Today global sentiment was somehow upbeat as Trump apparently softened his hard stance against other trade partner countries and mailed a letter to the Chinese premier. Also, tomorrow’s scheduled meeting of Abe (Japan) & Trump may help to ease some tensions created after recent wave of “Trump Tantrum”. 

China is also “controlling” its currency (Yuan) against USD & other SDR baskets very “well” and for that market is little relieved for the time being as Trump may not chase China too much for the “currency manipulator” tag. Thus, global “risk on” sentiment revived today amid some bids in USD/US bond yields despite continuous money market tightening by China/PBOC and increasing threat of EU political risks. With the passage of A-50 approval bills in the lower house of UK parliament, “Real Brexit” negotiations may be started by March’17 as earlier scheduled. Also, other EU nations, especially France, Italy, Denmark, and Germany are increasingly adopting nationalistic politics and if this “Brexit” like trend continues, then EU concept may be in jeopardy itself in the coming years.

Among all threes ongoing geo-political headwinds, “Hawkish Hold” by RBI & sudden change of monetary stance from “accommodative” to “neutral” may be positive for INR & Indian bond yields (G-SECS). A strong INR is also good for FPIS in their hunt for better bond yields as Indian bond yields may be now among the highest with the EM peers, making the INR a fantastic “carry trade” currency, despite its not fully convertible. A strong INR may be also good for FPI’s EQ portfolio and Indian economy as a whole, being an import oriented country.

But, sudden change of RBI’s stance to neutral from being accommodative may be also bad for Indian economy & the EQ market, at least sentimentally. Although theoretically, “Neutral” means that going forward RBI may cut or even hike as par the evolving domestic macroeconomic situation & global scenario; practically RBI may be in hold till FY-18 and thus rate cut cycle in India, which started from Jan’15 may have ended for the time being now.

Basically, RBI/MPC put the ball now in the court of the Govt & banks to create an appropriate atmosphere for full transmission of previous 1.75% repo rate cuts and only after that, RBI may consider further rate cuts. As par RBI, banks so far transmitted only around 0.90% of the previous 1.75% repo rate cuts including steep cut in MCLR by the banks in Jan’17. On the contrary, a recent statement by SBI may be indicating that they have already transmitted around 1.75% and unless RBI cuts more, it may be very difficult for the country’s largest lender to cut more; generally SBI is the lead banker of India and other PSBS & Private peers only follow its action.

Apart from previous rate cut transmission issues, some other real issues banks are facing for further rate cuts (transmissions) may be lack of adequate resolution for huge stressed assets (NPA problem), inadequate recapitalization effort by the Govt so far and above all, comparatively very high small savings interest rates. Also, slump in Indian bond markets after change of stance of the RBI may be bad for the India banks (capital loss-MTM in the bond portfolio, especially for recent buying after demonetization at higher bond prices).

Certainly, banks can’t lend below small savings rate and also can’t afford to take deposits (FD) from publics at significantly lower rate than the small savings rate. Although, RBI has advised the Govt to keep the small savings rate as par standard average 10Y GSEC bond yields (6-6.50%) in a floating manner rather than fixed around 8-8.5% as of now, it may be a very tough structural reform for any Govt as its involved the “Aam Admi” (common man/voters).

Thus, political compulsion may be a significant headwind for both the banks & RBI to transmit further from here on and so 6.25% repo rate may be the lower end of the rate cut cycle unless & until small savings rate is drastically cut to 6-6.5% as par average G-SEC bond yields.

Previously, market was assuming incremental cuts by RBI and more rate cuts transmission by the banks to the economy, but going forward, there may be little or no rate cut transmissions, especially after the steep transmission by the banks in Jan’17 and thus incremental benefit of the lower lending rates may be very muted & limited (only to quality borrowers).

Also, going ahead, rather than headline CPI, RBI will give more focus on core inflation (ex food & fuels), which is consistently on the higher side (at 4.98% in Jan’17).  Being an “inflation hawk”, Patel & MPC may also watch the effect of 7-CPC, demonetization/supply chain on the inflation and RBI is also clearly concerned of any inflationary impact of the GST (higher taxes on some commodities & services). Overall, RBI may be quite confused & also concerned about economic uncertainties and disruptive effect of demonetization. Thus, projected GDP may be at anyone’s guess now and on the risks of higher side as projected by the Govt in its budget estimates.

Going forward, Indian market may take cues from the ongoing Q3 results with SBI & BOB tomorrow to have a glimpse about their stressed assets after recent upbeat results from the private banks and some of the PSBS also. Demonetization & various loopholes in using the old currency notes may have helped significantly some of the consumer facing companies including banks. Also, there was sudden surge in paying regular & defunct loans (NPA/Write offs) in Q3 by demonetized notes (directly or indirectly). Thus, rather than Q3 results, Q4FY17 earnings and macro data may be more important to gauze the actual long term impact of the demonetization & stance of “war on black money”. In that sense, tomorrow’s IIP data may be also vital apart from CPI next week.

Also, market may keenly watch political developments as increasing “war of words” between BJP & Oppositions (Cong) may be another hurdle for smooth passage of final GST bill in the forthcoming Parliament sessions and implementation of the same from July’17 (?). Ongoing political crisis in TN may have also impact the passage & implementation of GST in H2FY18.

All eyes will be also on the ongoing state elections, especially for UP which may be very  tight between SP-Cong & BJP as par the latest grey market report, contrary to earlier favourable trend for the BJP.

Thus, a hawkish RBI (end of rate cut cycle), uncertain economic atmosphere because of demonetization & implementation of GST, growing corporate board room battle between founders & professionals (Tata, Infy), probable EL-Lino and deficient monsoon this year and various adverse geo-political issues including “Trump Tantrum” may be some of the significant headwinds for the Indian economy & the market despite tailwinds of a fiscally prudent budget, upbeat Q3 earnings, & strong DII inflows amid increasing retail participations for equities. 

The market may be very volatile in the coming days between these headwinds & tailwinds and as an investor, one should take this volatility as an opportunity with stock specific approach without any emotion rather than being in the side line. Buy/accumulation on significant dips (swing low) may work well rather than chasing a stock near its lifetime/swing high and for that one can take the advantage of a “black swan” day also.

 SGX-NF