Monday, 30 April 2018

Nifty jumped on mixed global cues and increase of FII bond purchase limit by the RBI

Market Wrap: 27/04/2018

NSE-NF (May):10724 (+91; +0.86%)

NSE-BNF (May):25468 (+446; +1.78%)

SPX-500: 2670 (+3; +0.11%)

Market Mantra: 30/04/2018

Updated: 08:30

SGX-NF: 10765 (+41; +0.38%)

Expected BNF opening: 25570 (+0.40%)

SPX-500: 2677 (+6; +0.22%)

(Gap-up opening on positive global cues amid some fall in US bond yields and USD coupled with upbeat earnings and increasing prospect of North Korean truce)

Fut-I (Key Technical Levels)

Support for NF:


Resistance to NF:


Support for BNF:


Resistance to BNF:


Support for SPX-500:


Resistance to SPX-500:


Technical View (Positional-Nifty, Bank Nifty, SPX-500):

Technically, Nifty Fut-I (NF) has to sustain over 10800 for a further rally towards 10840/10860-10900/10930 in the short term (under bullish case scenario). 

On the flip side, sustaining below 10780 NF may fall towards 10715/10690-10640/10590 in the short term (under bear case scenario).

Technically, Bank Nifty-Fut (BNF) has to sustain over 25675 for a further rally towards 25775/25850-25915/26050 in the near term (under bullish case scenario).

On the flip side, sustaining below 25625, BNF may fall towards 25450/25250-25050/24900 in the near term (under bear case scenario).

Technically, SPX-500 now has to sustain over 2685 for a further rally towards 2705/2730-2750/2765 in the near term (under bullish case scenario).

On the flip side, sustaining below 2675, SPX-500 may fall towards 2660/2645-2630/2610 in the near term (under bear case scenario).

Valuation metrics:

Nifty-50: 10692; Q3FY18 EPS: 410; Q3FY18 PE: 26.08; Avg FWD PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360

Bank Nifty: 25395; Q3FY18 EPS: 820; Q3FY18 PE: 30.97; Avg FWD PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220

The Indian market (Nifty Fut/India-50) is currently trading around 10770, soared by almost 0.44% on Monday (so far) amid positive global cues on some fall in US/EU bond yields coupled with upbeat earnings and increasing prospect of a North Korean truce. There was also a report that from the month of May, RBI will increase purchase limit of Indian government bonds gradually, which may bring the surging Indian bond yields lower. RBI is also considering increasing ECB borrowing limit for certain sectors such as real estate.

The Indian stock market may trade lightly on Monday as currency and bond market is closed for a public bank holiday and on Tuesday all the Indian market will be also closed for May-day/Maharastra day.

Although on Friday, the Indian market was boosted by hopes of a solid report card from RIL, it reported a slightly subdued number in comparison to the sky-high expectation of the market with some confusion about R-Jio accounting principle and stress on RIL’s petrochemical business margin. Thus, RIL is under stress on Monday, while HDFC duo is helping the market right now.

The Indian market soared on Friday amid mixed global cues and hopes of a solid report card from RIL:

The Indian market closed around 10724 on Friday, soared by almost 0.86% on mixed global cues amid fall in bond yields and hopes of blockbuster earnings from the Index heavyweight RIL. Nifty Fut made a late day high of 10744 after making am opening session low of 10640 on the first day of the May FNO series and it made a strong opening.

All sectors excluding techs (IT) were upbeat and banks outperformed as the benchmark 10Y Indian bond yields failed to cross the previous milestone high of 7.80% and closed almost flat around 7.767% after making a low of 7.740% in line with its global/US peers. Indian Rupee also gained some strength as USDINR slumped by 0.26% on Friday and closed around 66.62, slips from the recent high of around 67.05. Thus exporters (techs) came under some pressure.

As there were some earlier reports that RBI may ease the FII limit for the Indian government bonds from May gradually (@0.50%) for 2018-19, market may be assuming that bond yields will come under some stress as FII will jump in for buying Indian debts at yields of around 7.75%, which is the highest among its comparable peers with the highest level of safety also. But the stress on Indian macros and surging oil may be some of the factors that could also discourage the FIIs to jump in for the Indian debts amid higher US bond yields.

Apart from ease on bond yields, banks were in demand amid another report that government may ask the CBIC (central board of indirect taxes & customs) to withdraw the case for imposition of service taxes for providing some free services by the banks, that includes a retrospective demand for the last five years.
The Indian market sentiment was also boosted on Friday by another report that the government has collected around Rs.7.19 trillion as GST from Aug’17 to March’18 with an average collection figure of around Rs.0.90 trillion over this eight months period. Although this may be much less than the required /targeted amount of Rs.1-1.15 trillion/month, still it's upbeat considering that the GST is in initial phase with lots of disruptions, being the most complex, and costly indirect taxation system in the world with the highest tax rate.

The Indian market is also worried about the increasing litigations in the NPA/NCLT resolution process and growing incidences of corporate loan frauds in collusion with some crony promoters and bankers. Thus the government is in the cleaning process of the rotten banking system (corporate loan) before committing any further recaps to the PSU banks; otherwise, the same thing will happen again and again.

On Friday, Indian market was helped by Axis Bank, RIL (earnings optimism), ICICI Bank, L&T, SBI, Infy, HPCL, ITC, Sun Pharma, Tata Motors and others by around 119 points (89+30), while it was dragged by TCS, Maruti (subdued report card), HCL Tech, HDFC Bank, Tech-M, HUL, Yes Bank (upbeat report card), Hero Motor, Wipro, Coal India and others by almost 37 points (35+2) altogether.

Overall on Friday, the Indian market was helped by PSU Banks, selected private banks and financials, selected automakers, FMCG, media, metals, Pharma, reality (buzz of increasing ECB borrowing limits by RBI), consumption, energies (higher crude oil), and infra, while dragged by exporters (techs) and MNC on lower USD.

Axis bank surged despite a terrible report card on hopes that the NPA cycle is at its peak and the banks may be also an imminent takeover target by a new generation private bank such as Kotak, Indusind or Yes Bank.

Fitch has retained India’s rating at BBB- with a stable outlook:

Meanwhile, the global rating agency Fitch has retained India’s rating at BBB- with stable outlook without any upgrade as being sought by the government desperately. Fitch has cited the weak fiscal balance as one of the primary constraints for a rating upgrade of India and kept the status-co for the 12th consecutive years at BBB-, which is the lowest investment grade rating by Fitch.

But Fitch said India’s relatively strong external buffers and the comparatively closed nature (local economy rather than global) of its economy make the country less vulnerable to external shocks as compared to many of its peers.

Apart from weak fiscal balance and concern of fiscal discipline, Fitch pointed out some lagging structural factors, including corporate governance standards and a still difficult, but improving the business environment for its rating action, although it noted India’s strong medium-term growth outlook and favorable external balance.

As par Fitch: Weak fiscal balances, the Achilles’ heel in India’s credit profile, continue to constrain its ratings. General government debt amounted to 69% of GDP in FY18, while fiscal slippage of 0.3% of GDP in both FY18 and FY19 relative to the government’s own budget targets of last year, and implies a general (combined state and central) government deficit of 7.1% of GDP.

Fitch- The central government’s aim to gradually reduce its own fiscal deficit from 3.5% in FY18 to 3.0% of GDP by March 2021 is “well beyond its current electoral term”. “The government has reasserted its longer-term aim of gradual fiscal consolidation with an amendment of the FRBM Act to set a ceiling for central government debt at 40% of GDP and general government debt at 60% of GDP, to be reached by March 2025. This is a positive step towards a more prudent fiscal framework if eventually adhered to.

Fitch said, “India can expect a rating upgrade if it reduces general government debt over the medium term to a level closer to that of rated peers at 41% of GDP and maintains higher sustained investment and growth rates without the creation of macro imbalances, such as from successful implementation of structural reforms”.

“On the other hand, if public debt burden increases, which may be caused by stalling fiscal consolidation or greater-than-expected deterioration in the balance sheets of public sector banks as well as loose macroeconomic policy settings that cause a return of persistently high inflation and widening current account deficits, it could trigger a rating downgrade”.

Fitch projected the economy to revive to grow at 7.3% in 2018-19 and 7.5% in 2019-20 from 6.6% a year ago as a “temporary drag will fade from the withdrawal of large-denomination bank notes in November 2016 and the introduction of a Goods and Services Tax (GST) in July 2017”.

Fitch- The GST is an important reform, however, and is likely to support growth in the medium term once teething issues dissipate”. Fitch praised the RBI for building a solid monetary policy record, as consumer price inflation has been well within the target range of 4% +/- 2% since the inception of the Monetary Policy Committee in October 2016. However, it expects RBI to start raising its policy rates next year from 6% currently as growth gains further traction.

Fitch- Monetary tightening could be brought forward if recent government policies push up inflation expectations, including the decision to increase minimum support prices (MSP) for agricultural goods to 1.5 times the cost of production and increased customs duties on certain products, including electronics, textiles and auto parts.

Fitch said India’s relatively strong external buffers and the comparatively closed nature of its economy make the country less vulnerable to external shocks as compared to many of its peers. However, it cautioned that falling net FDI inflows at $23.7 billion in the first three-quarters of FY18 from $30.6 billion a year earlier are “insufficient” to cover a widening current account deficit, unlike in many of India’s peers.

Fitch said government’s efforts to liberalize the foreign investment regime such as allowing 100% FDI in single-brand retail through the automatic route may facilitate a recovery in FDI if combined with further investment climate reforms.





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