Nifty Snapped Five Day Budget Rally As Market Turned Cautious Ahead Of RBI Policy Amid Rebound In USD; 0.25% High Probability Cut By RBI May Be Already Discounted By The Market; Will Mint Street Surprise The Dalal Street Tomorrow?

Market Wrap: 07/02/2017 (19:00)

Looking at the chart, Nifty Fut (Feb @8790) 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 8805/8740-8690 & 8625-8565/8495 area in the near term (under bear case scenario).

RBI may sound more "hawkish/owlish" rather than "dovish" tomorrow due to various domestic & global challenges.

Nifty Fut (Feb) today closed around 8790 (-27 points), almost flat (-0.30%), but snapped the five day budget rally as market preferred some long unwinding/fresh shorts ahead of RBI MPC tomorrow. Market is also hovering around 4 months high and rallied almost 12% from post demonetization & Trump Tantrum Dec’16 low.

Indian market today opened in a slight negative tone following tepid global cues amid some EU political risks (France & Germany), renewed concern about Greece bailout programme (Grexit-4 !!) and plunge of China FX reserve below the psychological $3 TRLN mark. Also IIP data from Germany came below expectation and all these has made the USD stronger across the G-10 universe after recent correction of the same following mixed US economic data, specially tepid wage growth.

A rebound in USD coupled with tomorrow’s RBI MPC outcome may have prompted some profit booking by the investors in the domestic market and NF made an opening session high of around 8812 & late day low of 8759.

Time & price action may be also suggesting that, market may have already discounted the likely RBI repo rate cut of 0.25% tomorrow and if there is any positive surprise (like 0.50% cut or no cut in corresponding reverse repo cut), Nifty may further rally towards 8855-9000 level. On the other side, in the case of 0.25% cut or no cut (negative surprise), Nifty may drift towards 8690-8495 level. 

All eyes will be also on the Patel/MPC tone & commentary tomorrow and it may be “Hawkish/Owlish” rather than “Dovish”, considering overall trajectory of core inflation, average CPI for CY-16 (4.96%) including demonetized months (Nov-Dec’16 @3.52%), strong USD & Oil, actual impact of demonetization on the overall economy & trajectory of FY-17 & 18 GDP, 7-CPC & implementation of GST from Sep’17 (?) and its impact on overall inflation. There are still lots of uncertainties for the Indian economy after the surprised demonetization and the ongoing “war on black/unaccounted money” despite a fiscally prudent upbeat budget for FY-18 with no negative shocker till now. Also, ongoing EU & US political risks and trade protections stance may make the RBI cautious going ahead.

Thus, as par text book economist, Patel/MPC may go for an “Owlish Cut” of 0.25% tomorrow and may again cut in H2FY17 (Oct) by 0.25%, depending upon the overall domestic & global macroeconomic and geo-political situation.

On the other side, RBI may even cut by 0.50% tomorrow irrespective of USD & other macroeconomic equation, simply to “kick start” the Indian economy after demonetization disruptions from the very beginning of the FY-18, rather than spread it over H1 & H2. As CPI dipped significantly in the last two months, thanks to demonetization led cash crunch & seasonal effects (food/vegetables/pulses inflation), the real bond yield differential between USD & INR also narrowed to some extent and going by the recent mixed US economic data & Trump’s intention to devalue USD, Fed may be in hold till June’17. Fed may hike only twice (June & Dec’17) this year against the previous dot plots of three hikes in 2017 and that too will depend upon the actual trajectory of “Trumponomics”. 

At present, the much talked fiscal/infra spending rhetoric of Trump may have replaced with trade protection, border tax, Mexico border wall, immigration/travel ban etc and this type of “Trumpomania” may continue till March-April’17 (US budget time). If there is no real sign of “Trumponomics”, Fed may eventually go for only its one yearly hike (Dec’17) and that may give RBI ample room for another 0.25% cut (total 0.75% cut in 2017-18) to bring the repo rate at 5.5%.

But, the real question is how much of these rate cuts (0.50-0.75% by Feb’18) will help the economy or the borrowers as banks have already lowered their MCLR/PLR significantly and more transmission may be only possible by the banks, if small savings rate in India will go south drastically. As of now, drastic reduction in the small savings rate may not be politically possible in a democratic country, like India and banks can’t lend at a rate significantly below 8% also, despite favourable bond market.

As there is no significant uptick in credit demand and almost 10% of the Indian bank’s advance has turned into NPA, RBI may focus on actual resolution of the stressed assets apart from ongoing recognition process (AQR) and may also express some concern on the quality of retail & SME loans after demonetization and probable blue collar IT & other job losses because of “Trump Tantrum”. 

As par some market buzz, RBI may also forecast FY-17 GDP growth at around 6.2% amid demonetization blues. In the FY-18 budget speech, Govt advocated for a nominal GDP growth of 11% (slashed from 11.90% by CSO) for FY-17 and inflation adjusted actual real GDP may be around 6%. For FY-18, Govt assumed a nominal GDP growth rate of 11.75%. Both the projected figures of absolute GDP for FY-17 & FY-18 (Rs.15075429 cr & Rs.1684747455 cr) may be quite uncertain and on the upper side, which may affect the actual fiscal deficit/GDP ratio or the Govt capex. Also, the disinvestment projection figure of Rs.72500 cr for FY-18 may be also looked on the upside (against FY-17RE of Rs.45500 Cr). The same may be also true for the overall steep incremental projection in direct & indirect tax collections amid demonetization blues, GST and actual IDS collection uncertainty.

For FY-16, there was significant deviation for the Govt announced fiscal deficit/GDP ratio (3.9%) and that by the CAG (4.3%). The divergence may be because of differences in accounting method, where Govt is adopting a cash based approach, whereas CAG is taking the usual accrual based accounting method. As par some analysts, the same may be reported by CAG as 3.9% against Govt RE of 3.5% for FY-17. The real combined state & centre fiscal deficit/GDP ratio may be around 7-7.5% and this may be the actual concern for the rating agencies to upgrade India in the near future. 

Apart from high combined fiscal deficit & Govt Debt/GDP ratio, tepid private investments, problem of twin balance sheets (high banking NPA/NPL & stressed corporate balance sheets), actual implementation of vital reform such as GST and lack of land & labour reform may be some of the other headwinds for the Indian economy, which policymakers need to resolve for a rating upgrade (which is still just one notch above international junk, despite Govt’s best effort).

Market will also keenly watch RBI's projection for FY-18 GDP growth to have an idea, how fast policymakers are expecting the normal growth of the Indian economy after demonetization led disruptions. Any projection of FY-17 GDP below 6.5% may cost India's tag of the "World's fastest growing economy" To China and may also cause some volatility in the market.

SGX-NF