Wednesday, 7 June 2017

Nifty Closed 0.20% Higher As RBI Lowers CPI Projection For FY-18 & MPC Sounded Less Hawkish

Market Wrap: 07/06/2017 (17:00)

NSE-NF (June): 9685 (+19; +0.20%) (TTM PE: 24.46; Near 2 SD of 25; TTM EPS: 395; NS-9664)

NSE-BNF (June): 23608 (+176; +0.75%) (TTM PE: 29.64; Near 3 SD of 30; TTM EPS: 795; BNS-23568)

For 07/06/2017:

Key support for NF: 9630-9570

Key resistance for NF: 9715-9750

Key support for BNF: 23700-23875

Key resistance for BNF: 23400-23200

Time & Price action suggests that, Nifty Fut (May) has to sustain over 9750 area for further rally towards 9825-9865 & 9930-10050 in the short term (under bullish case scenario).

On flip side, sustaining below 9730-9715 area, NF may fall towards 9630-9570 & 9530-9470 area in the short term (under bear case scenario).

Similarly, BNF has to sustain over 23700 area for further rally towards 23875-24000 & 24100-24150 area in the near term (under bullish case scenario).

On the flip side, sustaining below 23650 area, BNF may fall towards 23400-23200 & 23050-22900 area in the near term (under bear case scenario).

Nifty Fut (June) today closed around 9685 in a late day up move after RBI policy induced volatility, which made the NF for a session low of 9651; but as RBI sounded apparently less hawkish today, Nifty and specially Bank Nifty recovered quite smartly from the day low and closed almost 0.20% & 0.75% higher respectively. Before RBI policy, NF made an opening session high of around 9698 , but dropped suddenly before RBI policy amid reports of some terrorist incidence (shooting) in Iran Parliament.

Today, as expected RBI leaves repo rate unchanged at 6.25% but cut the SLR rate by 0.5%, which may release additional liquidity of around Rs.60000 cr into the banking system. Moreover, RBI lowers its hawkish inflation trajectory for FY-18, which may have fueled the speculation that RBI’s next move may be a 0.25% cut in Aug’17 (??). These two factors (SLR cut & less hawkish projection on inflation) may have supported the market sentiment today by some extent despite RBI’s overall stance is still neutral against market expectation of accommodative.

Today RBI’s policy points are:

RBI leaves repo rate unchanged at 6.25%
Reverse repo left at 6.00%; LAF/MSF all unchanged
Cuts statutory liquidity ratio of banks by 50 bps to 20% of total deposits
Ceiling on amount of securities that can be held under "held to maturity" remains unchanged
Policy interventions inclusive access to open trade may be envisaged to arrest slump in prices
Easing of inflation ex food and fuel may be transient in view of underlying stickiness in situation of rising rural wage growth and consumption demand
Headline inflation for H1 2017/2018 2-3.5% and 3.5-4.5 in H2, If April Configuration Sustains
Need to ensure whether or not the unusually low momentum in inflation reading for April will endure
5 members of MPC in favour of policy decision, Dholakia not in favour
All MPC members declined request for pre-policy meeting with finance ministry
CSO data shows slowdown in economic activity set in well ahead of demonetization
'Will watch data on real eco activity.If data warrants,will act for broader accommodation'
RBI revises FY18 GVA forecast to 7.3 percent Vs 7.4 percent
RBI DY GOVERNOR: Interest Rate Policy Works Well When Transmitted Seamlessly; RBI Has Embarked On Resolving PSU Banks' Stress
RBI Governor: GDP slowdown more due to fundamental factors.
Farm Loan Waivers Have Raised Risk Of Fiscal Slippages; GST Roll-out To Not Have Material Impact On Inflation
Inflation Reading For April Surprised On The Negative Side
Private investment slowdown deeply rooted in structural debt overhang
Governor Patel On Farm Loan Waiver 'Need To Tread Carefully Before Situation Gets Out Of Hand'
GDP Estimates Attest Effects Of Note Ban On Economy. Govt Spending Continues To Be Robust
MPC keen to avoid 'premature' action at this stage.
Rationalised risk weights, loan-to-value norms on home loans.
Policy decision today consistent with 'Neutral' stance.

Thus, overall, although RBI is maintaining its present neutral stance, it’s watchful (owlish) both on GDP & inflation and will wait for further data if Q4FY17 trend of dual combination of lower GDP & lower inflation is transitory or not. If such trend continues in Q2/Q3FY18, RBI may take some policy action (cut). Thus, RBI is clearly data dependent and is not in favour of any pre-mature cut. So, today’s RBI policy may be termed as neutral.

Today’s RBI policy to reduce risk weight on specific categories of housing loans may be slight positive for some HFC as standard asset provisioning on such loans will go down. RBI has reduced PCR to 35% for home loans in the Rs.30-75 lk and to 50% for HL>75 lk (from 75%).

RBI also again pointed high small savings rate in India, which may an issue for further transmissions of lower repo rates by the banks and called for better alignment of administered interest rates on such small savings instruments with market rates (GSEC) and steeped up recapitalization of the banks along with the issues of NPA resolution to facilitate adequate flow of credit to productive sectors; clearly RBI is still pushing the ball to the Govt’s court for NPA resolution and further rate cut transmissions because the problem of twin balance sheets (stressed corporate & banks B/S) and high small savings interest in India (political issue) may be the primary problems for further rate cut; otherwise it may be futile except helping NIM (operating margin) of some of the lenders/banks. Although, there is enough liquidity in the banking system, there are no demands for corporate loan as there is severe lack of quality & eligible borrowers amid question of project/business viability itself. Even if RBI cut by another 0.25-0.50% in FY-18, credit flow to the corporate sectors may not improve substantially and private investments may remain muted due to NPA/corporate stress issues and lack of adequate demand in comparison to installed capacity of the economy.

Any sudden change of RB stance from neutral to accommodative for an unexpected fall of GDP in one quarter may also hurt the image & credibility of RBI and in that scenario, INR & GSEC bond yields may suffer,which may also cause some panic among FPIS.

Today Indian market opened almost flat following mixed global cues and risk aversion ahead of UK election, ECB meet & Comey’s testimony. Overnight, US market closed slightly lower (-0.23%) amid risk aversion and fall in USD/US bond yields. Apart from various geo-political risks (UK election, Comey’s testimony, alleged Russian involvement in US election/ with Trump camp, GCC-Qatar diplomatic crisis), Fed’s high probable dovish hike stance next week, US bond yields were also under pressure die to some reports that China is active in buying/planning to buy more USTSY bonds after its recent selling Feb-March.

But USD/US bond yields recovered slightly towards the closing NYT/US session after another ABC news report that Comey will make White House uncomfortable but will stop short of saying President interfered in the FBI investigation. S&P also reconfirmed US rating yesterday and that may have also supported the USD to some extent, Yesterday’s US JOLTS jobs report was also upbeat and being one of the favourite job indicator of Fed, market may be also assuming that Fed may have no issue to hike next week; but underlying tone may be more important (hawkish/dovish).

Meanwhile, ahead of ECB meet tomorrow, EURUSD suddenly dropped by another 0.5% on a BBG report that Draghi may be preparing for a lower inflation projection for CY: 17-19 (1.5% against earlier 1.6-1.7%); i.e. Draghi may be sounded dovish tomorrow although he may still indicate a gradual taper. Eventually, ECB, BOJ, PBOC and other major central bankers will follow Fed’s actual rate hike path and any B/S tapering in the coming months to adjust their own policy and keep the USD parity at present level, which may be ideal to maintain growth & inflation.

After all, Fed is the only major central bank in the world today, which is hiking its rate on multiple times to begin the much awaited normalization policy and B/S reduction; under these scenario, other major central banks may have no other way, but kept themselves as neutral, if not hawkish to keep the divergence in monetary policy at present level.



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