The Indian market is under renewed stress Friday on lingering worries about the IL&FS credit crisis and its contagion effect on the overall financial and corporate bond market. There was a report that SEBI has asked MF houses not to roll over their current exposure to Indiabulls Housing Finance, DHFL. But later SEBI has officially denied any such advisory. Meanwhile serial defaults by the IL&FS continue and all these creating like a panic situation in the market despite RBI/government effort to boost up the market sentiment by a number of liquidity enhancement measures (LCR/OMO/ talk of special MF liquidity window).
On Thursday, the Indian market slips further after imposing additional import duties on several consumer goods and electronic items (to stem ballooning trade/current account deficit), coupled with higher oil, higher USD and ongoing liquidity and NPA crisis in the NBFC space (Indian version of shadow banking and sub-prime lending); big private banks also dragged on growing concern about “hidden NPA”. The market is now also concerned about India’s “sub-prime” NPA (retails/MSMEs) and housing loans apart from the huge corporate NPAs.
The imposition of additional import tariffs on several consumers, electronic items as-well-as industrial goods may cause higher inflation and subdued consumer spending. Airlines were also under pressure after the government hiked import duties on ATF.
The market is now expecting another 0.25% rate hike by the RBI on 5th October (policy date) to bring the Indian rate at 6.75% to stem the currency (INR) fall. The Indian 10Y bond yield is now hovering above 8% and if it sustains above 8% for next few months, RBI may also hike by another 0.25% to 7.00% by Dec’18 or by Feb’19. Historically, the spread between Indian 10Y bond and the RBI repo rate is around 1% and thus either the 10Y bond yield has to fall below 7.50% or the RBI has to hike to 7%. The 2nd probability (RBI hike) is higher.
The current spread between the Indian 2Y bond yield (7.996%) and 10Y bond yield (8.042%) is around 5 bps. A few days ago, during the corporate bond market panic days, 2Y yield made a high of 8.395%, whereas 10Y jumped to 8.231% and the spread was at -16 bps. All these are indicating the Indian version of bond yield inversion/flattening and an imminent slowdown or “correction” of the “hot” economy down the next 2-3 years.
Updated: 09:15
Nifty-SGX-NF: 11100 (+70; +0.63%)
Bank Nifty-BNF: 25415 (+216; +0.86%)
USDINR-I: 72.88 (+0.00; +0.00%)
SPX-500: 2922 (+2; +0.08%)
Fut-I (Key Technical Levels)
Support for NF:
11080/11000-10970/10940*-10910*/10860-10810/10780-10750/10700
Resistance to NF:
11105/11135*-11195*/11215-11240/11295-11315/11345-11385/11415
Support for BNF:
25400/25200-25000/24900*-24650*/24400-24100/24000-23800/23650
Resistance to BNF:
25575*/25675-25750/25850-26050*/26150-26250/26350-26575/26700
Support for USDINR-I:
72.30/72.00*-71.50/71.25*-70.95/70.70-70.50/69.95-69.60/69.15
Resistance to USDINR-I:
72.95/73.05*-73.35*/73.75-74.25/74.50-75.00/75.65-77.50/79.70
Support for SPX-500:
2915*/2905-2885/2860-2840/2815-2790/2750
Resistance to SPX-500:
2945*/2960-2990/3010-3035/3070-3095/3155
Technical View (Nifty, Bank Nifty, USDINR-I, SPX-500):
Technically, Nifty Fut-I (NF) has to sustain over 11155 for a further rally to 11195/11215-11240/11295-11315/11345 in the near term (under bullish case scenario).
On the flip side, sustaining below 11135-11105 NF may fall to 11080/11000-10970/10940-10910/10860-10810/10780 in the near term (under bear case scenario).
Technically, Bank Nifty Fut-I (BNF) has to sustain over 25575 for a further rally to 25675/25750-25850/26050-26150/26250 in the near term (under bullish case scenario).
On the flip side, sustaining below 25525-25400 BNF may fall to 25200/25000-24900/24650-24400/24100-24000/23800 in the near term (under bear case scenario).
Technically, USDINR-I has to sustain over 72.30 for a further rally to 72.95/73.05-73.35/73.75-74.25/74.50-75.00/75.65 in the near term (under bullish case scenario).
On the flip side, sustaining below 72.00, USDINR-I may fall to 71.50/71.25-70.95/70.70-70.50/69.95-69.60/69.15 in the near term (under bear case scenario).
Technically, SPX-500 has to sustain over SPX-500 has to sustain over 2950-2960 for a further rally to 2990/3010-3035/3070-3095/3155 in the near term (under bullish case scenario).
On the flip side, sustaining below 2945-2935, SPX-500 may fall to 2915/2905-2885/2860-2840/2815 in the near term (under bear case scenario).
Valuation metrics:
Nifty-50: 11000; Q4FY18 EPS: 402; Q4FY18 PE: 27.36; Avg FWD PE: 20; Proj FY-19 EPS: 425-450; Proj Fair Value: 8500-9000.
Bank Nifty: 25200; Q4FY18 EPS: 519; Q4FY18 PE: 48.55; Avg FWD PE: 20; Proj FY-19 EPS: 961-1000; Proj Fair Value: 19220-20000.
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