Market Mantra (Nifty Fut/Bank Nifty Fut/USDINR/SPX-500): 05/10/2018

The Indian market tumbled Friday on negative global cues amid higher global bond yields, higher borrowing costs and concern of US-China geopolitical tensions. The Indian market is also under stress on higher USDINR and higher Brent oil coupled with political populism by the government to suddenly reduce Rs.1.50 of fuel cess and Rs.1.00 by OMC (total Rs.2.50) ahead of the vital state elections after months of denial.

The Indian government has previously imposed around Rs.10.00 in total cess to fund fiscal deficit and infra/road capex in addition to other central duties and VAT by states. The total fuel tax component is more than 50% against global standard/average of 25%. The Rs.1.00 deduction in cess will cost the revenue by around Rs.10B, which is around 0.003% of the 3.3% fiscal deficit target. Although average GST collection is now around Rs.92B per month, it's consistently below the target of Rs.100B.

The market is expecting that the RBI will raise the rate again today (5^th Sep) by 0.25% to hike the Indian repo rate to 6.75% with a hawkish tone and may hike again in Dec’18 to save the currency (rupee), everything being equal. The Indian 10Y bond yield is currently trading around 8.15% and is sustaining above 8%. The historical spread between the 10Y GSEC and the RBI repo rate is around 1% and thus either RBI has to hike rate to 7% at least or the Indian 10Y GSEC (bond) yield should fall and sustain below 7.50%, which is now very difficult, considering the 10Y US bond yield sustaining above 3.15-3.00%.

The historical spread between Indian 10Y and the US 10Y is around 5.5% and thus the Indian bond yield would stay around 8.50-9.00% in the coming days. The RBI/government policy will ensure this; otherwise who will invest in the “India growth story” and “Modinomics”?

The US bond yield is soaring primarily on USD shortage (as a funding currency), lack of institutional foreign (Japan/EU) buying of US Treasuries due to high and unviable hedging costs (negative return and high-cost year-end FWD contract rollover issue).

The US bond yield has also jumped on upbeat US economic data (6-months high ADP job and 21-year high ISM non-manufacturing PMI data) released Wednesday and a chorus of hawkish Fed talks for the last few days, mainly focusing on “neutral” rate as Fed is approaching it fast and bolstered the case for a faster pace of Fed rate hikes. The Fed Chair Powell said the Fed could eventually raise the Fed funds rate past the neutral level.

Historically, Indian rupee always tumbled in the general election year and recovered slightly after the election, if the favorable party wins. This may be an indication of Indian black money stashed abroad getting round trip to fund the unofficial expenses of election and political funding. This year it’s no difference, but the EM currency tantrum and boiling oil have made the situation worse and the government is now basically panicking after months of downplaying it despite various red signals.

The Indian rupee is steadily depreciating since the last one year mainly for the dual QT by Fed and issuance of excessive US debts (Treasuries) to fund “Trumponomics”, which is creating a USD shortage in the system, especially in the high CAD (Oil) related South-East Asian countries. Also, muted FDI/FPI and NRI in-flow is keeping the USDINR elevated. RBI and the Indian government is now basically helpless until FPI/FDI inflow resumed in a significant way.

The RBI may be in a double whammy now as if it hikes with a hawkish tone further to save rupee, the stock market may react adversely further and the resultant FPI out-flow will also make rupee weaker. If RBI does not hike or even hike with a dovish tone, the rupee will fall further and FIIs will also rush more for the exit, resulting in a further stock market crash.

Updated: 09:35

Nifty-SGX-NF: 10550 (-81; -0.77%)

                                                                 

Bank Nifty-BNF: 24844 (-10; -0.02%)

USDINR-I: 73.73 (-0.20.; -0.16%)

SPX-500: 2911 (+4; +0.15%)

Fut-I (Key Technical Levels)

Support for NF:

10515*/10450-10400/10345-10195/10165-10105/10000-9950/9870

Resistance to NF:

10640*/10660-10700/10750-10790/10835-10895/10935-10980/11025

Support for BNF:

24650*/24400-24200/24100-24000/23900-23800/23650-23600/23300

Resistance to BNF:

25050*/25200-25300/25400-25575/25675-25750/25875-26050/26150

Support for USDINR-I:

73.45/73.00*-72.75/72.25-72.00/71.50-71.25/70.95-70.70/70.35

Resistance to USDINR-I:

74.05/74.25-74.50/75.00-75.65/76.00-76.55/77.00-77.50/79.70

Support for SPX-500:

2905/2880-2865/2845-2835/2810-2790/2780-2765/2735

Resistance to SPX-500:

2925/2935-2945/2960-2990/3010-3035/3070/3095/3155

Technical View (Nifty, Bank Nifty, USDINR-I, SPX-500):

Technically, Nifty Fut-I (NF) has to sustain over 10660 for a further rally to 10700/10750-10790/10835-10895/10935-10980/11025 in the near term (under bullish case scenario). 

On the flip side, sustaining below 10640-10600 NF may fall to 10515/10450-10400/10345-10195/10165-10105/10000-9950/9870 in the near term (under bear case scenario).

Technically, Bank Nifty Fut-I (BNF) has to sustain over 25050-25200 for a further rally to 25300/25400-25575/25675-25750/25875-26050/26150 in the near term (under bullish case scenario).

On the flip side, sustaining below 25000 BNF may fall to 24650/24400-24200/24100-24000/23900-23800/23650-23600/23300 in the near term (under bear case scenario).

Technically, USDINR-I has to sustain over 73.00-73.45 for a further rally to 74.05/74.25-74.50/75.00-75.65/76.00-76.55/77.00-77.50/79.70 in the near term (under bullish case scenario).

On the flip side, sustaining below 72.75-72.25, USDINR-I may fall to 72.00/71.50-71.25/70.95-70.70/70.35 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 2945-2935/2915, SPX-500 may fall to 2905/2880-2865/2845-2835/2810-2790/2780-2765/2735 in the near term (under bear case scenario).

Valuation metrics:

Nifty-50: 10500; Q4FY18 EPS: 402; Q4FY18 PE: 26.12; Avg FWD PE: 20; Proj FY-19 EPS: 425-450; Proj Fair Value: 8500-9000

Bank Nifty: 24800; Q4FY18 EPS: 519; Q4FY18 PE: 47.78; Avg FWD PE: 20; Proj FY-19 EPS: 961-1000; Proj Fair Value: 19220-20000 (assuming NPA recovery).

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