Market
Wrap: 10/02/2017 (19:00)
With
today’s closing, Nifty finished the post budget & RBI week almost 0.6%
higher amid upbeat/mixed Q3FY17 earnings & macro data; what’s for next
week?
Looking at the chart, Nifty Fut (Feb @8809)
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 & 8665-8585 area in the near term
(under bear case scenario).
Nifty
Fut (Feb) today closed around 8809, almost flat after making an opening session
high of 8838 and day low of 8786 and also finished the eventful week almost
0.6% higher helped by positive global cues, a fiscally prudent FY-18 budget
without any negative shocker and a surprised “Hawkish Hold” by RBI, boosting INR
& G-SEC bond yields, after change of stance from “Accommodative” to “Neutral”.
Also
better than expected Q3FY17 earnings and mixed PMI & auto sales data may
have convinced the market that demonetization blues were overdone and along
with that recent weakness in USD/US bond yields has helped the Indian market to
be at par with the global market before the demonetization.
Domestic
market today opened in a positive tone following upbeat global cues after Trump
promised to announce a “phenomenal” tax plan for US in the next few weeks.
Also, better than expected China trade data & better communications between
China & Trump has prompted an upbeat “risk on” sentiment, especially for
metals (iron ore). Japan was also trading higher by more than 2% as Yen lost
some recent strength and also by the prospect of better US-Japan business ties ahead
of meeting between Abe & Trump.
But,
market may be also concerned that despite so much “Trumponomics” rhetoric,
Trump did not divulge anything specific for his fiscal/infra spending & tax
cut plans. As par earlier perception, Trump may propose a US corporate tax of
15-20% and most probably the 20% rate will be passed by the senate/US congress
as there is already a consensus for it.
For
India, although after availing various exemptions, corporates are actually paying
taxes around 25% (original tax 30% for big corporates), Govt need to simplify the
same as par international/US standard and may also require to bring it at
comparable level with the US & other DM, in order to attract more FDI. But,
as par the Govt, it may be very difficult to slash the big corporates tax,
considering fiscal deficit strain.
IT
counters were upbeat for the last few days after recent crash as probability of
an immediate executive order by Trump for H1B Visa issues may be slowing down
and it may be put through US congress as a bill. Also, recent change of stance
from fierce trade protection & “America First” rhetoric to softer attitude
towards China & Japan may be giving some relief from the “Trump Fatigue”.
But,
Trump’s rhetoric about US judges for the immigration ban issues and the
comments that “We will look you in Supreme Courts” may also keep the market
cautious.
Bank
Nifty underperformed the Nifty for the last few days after surprised “Hawkish
Hold” by the RBI this week. RBI also clearly raised some concerns about higher
trajectory of core inflation and overall uncertain economic conditions after
demonetization. As there is virtually no scope to transmit or cut MCLR by the
banks unless small savings rate in India go down by around 2%, RBI push the
ball basically to the Govt’s court and changed its “accommodative” stance to “neutral”
for the time being or till FY-18. Thus the trend of lower rate in Indian since
Jan’15 may be now over. This basically means that, RBI will be in hold in FY-18
till Govt do something structural reform to bring down the historically high
Indian small savings rate at par with the concurrent 10YGSEC bond yields
(average 6-6.50%) in a floating manner. The interest rate for small savings is
fixed around 8-8.5% as of now.
As
any drastic change in small savings rate may be very difficult politically in a
democratic country like India as it involves the “Aam Admi” & also senior
retired citizens having little exposure to the equity market, it will take
considerable time. Meanwhile, RBI & Govt might thought it will be prudent
to save the INR and offer better bond yields to the angel investors (FPIS) by
not cutting the repo rate unnecessarily, only for the benefit of NIM for the
banks; otherwise who will fund the “India Growth” story in the absence of banks
funding as a result of weak balance sheets and huge stressed assets (PSBS)? In any way, banks are already flushed with low
cost demonetized deposits and there is no lack of liquidity in the system; the
only deficiency may be sufficient fresh credit demand or of quality borrowers.
Credit demand will only pick up in India, when there will be visible uptrend in
overall economic recovery, demand/consumption and better capacity utilizations
by the companies.
Govt
may also be not very enthusiastic about bringing small savings rate as par with
10YGSEC bond yields as it may be another stable source of funding for fiscal
deficit/infra & social spending. Also, Govt is not too much inclined to
recapitalize the ailing Indian PSBS with taxpayer’s money, unless & until
the actual resolution (not recognition) of the stressed assets (NPA/NPL) take
place.
As
of now, none of the above conditions (cut in small savings rate, resolution of
NPA, adequate rapid recapitalization of the PSBS) are going to happen in a
hurry either by the Govt or by the banks and as such RBI may be quite right in
its neutral stance for FY-18, rather than being accommodative all the times.
At
least, FPIS will pour more funds for the beauty of comparatively higher &
safer Indian bond yields, which may be a rare combination in today’s world of
NRIP/ZRIP. Moreover, if “Trumponomics” take some concrete shape in the coming
days, US bond yields may jump towards 2.6-3% area and in that scenario, RBI has
to maintain the real USDINR bond yield differentials by taking a “hawkish”
stance to attract the FPIS in the bond market, which is much more important for
the Govt to fund its fiscal deficit rather than the EQ market despite theme of
disinvestments. If Indian bond market is stable, then EQ market will be also
stable along with INR.
Thus,
going forward, we may not be surprised, if RBI talks about hiking repo rate once
again, if core inflation/headline CPI takes an upper trajectory after
demonetization led supply chain disruptions, 7-CPC induced liquidity and any
implementation of GST from July’17 (forget about further cuts in FY-18).
In the
recent past, Indian economy might be a rare combination of higher growth and
lower lending rates and looking ahead, this theme may change to lower growth
& higher/static lending rate, which may be not good for the Indian EQ market
(stagflation?).
On
the other side, although Fed has projected 3-2 rate hikes in 2017, going by
Trump’s recent rhetoric about adverse effect of a stronger USD, currency manipulation
by other countries (China/Japan/EU/UK) and overall mixed US economic data &
lack of any specific fiscal spending plan so far may compel Yellen for the
usual one annual rate hike of 0.25% in Dec’17. This may be the only hope for
RBI to stay pat till FY-18 in order to gauze the actual impact of
demonetization on the economy; otherwise it has to take the path of verbal jawboning
or even hike to stay above the curve. Thus, for the Indian economy, rate cut
cycle may have ended with RBI repo rate at 6.25%, whereas for the advanced
economy (DM) or even for some of the EM, it’s much less.
The
real rate of interest is traditionally higher in India and it’s may be one of
the primary legacy issues apart from high regulatory fees & other high
costs for today’s huge stressed assets in the banking system, whereas a
business is simply not viable or is not able to withstand severe competition
both in the domestic as well as international market, if anyone is doing
business solely on the high cost banking funds. Big corporates has no problem
in accessing low cost funds from other sources, but SMES & unorganized
sectors are not and the real problem of employment generation starts there.
In
pre-demonetized days, an informal business was able to do his business by his
own undeclared wealth or informal private borrowing or so called “black money”
without the help of a formal bank borrowing. Now, after demonetization, such informal
business will have to comply the formal way and the overall cost of compliance may
not be viable for such business model; so such business may have to change
their model or have to take some innovative path to stay there or has to close
down. The basic problem starts here, which may result in more unemployment for
the huge informal cash economy in India. Most of the formal sectors are already
digitalized and for them, demonetization may be only a transitory issue except
some long term problem of adequate demand for high end products & services,
which may be affected by the stance of “war on black money”.
After
market hours today, Indian IIP flashed as (-0.4%) for Dec’16 against estimate
of 1.1% (prior: 5.7%); overall data may be quite tepid and also not good for the
market sentiment amid demonetization blues.
SBI
commentary after the result today may be also indicating a tepid trend of
recovery and adverse effect on the NPA after demonetization; apart from the old
legacy issues of big corporate stressed assets, now, widespread problem of MSME
NPL may be more acute in the days ahead.
Market
sentiment may be also dragged today after FM virtually confirmed that it’s not
possible to implement the GST from Apri’17 and as such Sep’17 is now a “constitutional
liability”. But, there is still various uncertainties regarding the GST launch
this year as political, economic and also administrative atmosphere may be not
very conductive for implementation of the same in such a short period of time
with lots uncertainties are still there; otherwise an attempt to launch a
faulty GST with so much regulations in a hurry may be viewed as another
disruption and Indian economy may not be ready yet to withstand such successive
disruptions (demonetization & GST) within a short period of time.
SGX-NF
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