The Indian market (Nifty Fut/India-50) closed around 10660 on Friday, tumbled by almost 0.43% and extended its slump on subdued global cues and domestic political populism ahead of state elections. The market opened gap-down on Friday around 10675 on subdued global/Asian cues amid concern of US-China trade negotiations outcome and a lower USD on Fed’s “symmetrical” view about US inflation. The global market is concerned about US stagflation rather than a “Trumpflation” as Fed is hawkish on inflation, while dovish on economic growth.
All focus is now on US NFP payroll data later in the day. Domestic market may have focused on earnings, politics-Karnataka election, macros-higher oil and NPA/NCLT resolution, which may not be in good shape and thus Nifty skids to the day low of 10640 after making an opening session high of around 10688 on Friday, in a range bound market.
The Indian market came under stress after reports that BJP has promised another farm loan waiver of up to Rs.1 lakh (0.10 million) for the Karnataka farmers in its poll manifesto released on Friday ahead of the state election on 12th May. In addition to farm loan waiver, BIP will ensure that farmers receive 1.5 times cost of production as MSP. BJP will also allocate Rs.1.5 trillion for various irrigation projects in the state to ensure water reaches every field in Karnataka as “welfare of farmers has always been its priority”.
As par, the BJP poll manifesto, crop/farm loan waiver will include all the loans from the PSU banks including co-Operatives and BJP will announce the crop loan waiver in its first cabinet meeting, if elected to form a government (like it did in the UP election).
The current ruling party INC may have also talked about the same language in the “interest of the Karnataka farmers” and thus the market is concerned about fiscal deficit and inflationary impact as a result of repeated farm loan waiver and offering of MSP (minimum support prices) at 150% (profit) of the cost of production. As rural belt (farmers) of Karnataka is a huge vote bank for any political party, both BJP and INC are now busy to woo them to get votes in the crucial state election.
Apart from politics, all the focus may have also on economics amid the GST council meeting. Previously, there was some speculation on early Thursday that government may further simplify and lower GST rates, but on late Thursday, the government declined any such probability. After the GST meeting on Friday, Kerala FM commented that it may take another 6 months before GST return system stabilizes. Thus, the market was a bit disappointed as the Indian GST system is perhaps the most complicated and costly one with the highest slab of taxes in the world now.
There was another concern in the form of increasing litigations over the NCLT/IBC process of NPA resolutions. As par report, NPAs worth Rs.0.70 trillion is on the risk of liquidation rather than resolution, which is negative for both the banks and the stressed companies. Although Banks are preferring resolution rather than liquidation as scrap value for the stressed assets, it may be quite tough considering India’s huge NPA/NPL and a lack of business/financial viability for most of the stressed projects coupled with the concern of increasing litigation and bidding costs.
India’s Service PMI for April came upbeat:
On the positive side, on Friday India’s Service PMI for April came upbeat at 51.4 vs 50.4 mapped in March (just above the boom/bust line of 50.0). The service PMI data shows economic activity in India’s dominant service sector accelerated in April thanks to a pickup in new business that encouraged firms to hire at the fastest pace in seven years. As a reminder, the service sector plays a crucial role in India’s economy as it contributes almost 60% to the country’s GDP.
Overall, improved composite PMI data (51.9 vs 50.8) for April, the highest in three months may be an Indication of solid services and manufacturing growth, supported by improved demand as the economy is now limping back to normal, shrugging off the earlier GST and DeMo blues.
As par Markit: “It was encouraging to see the Indian service economy report a positive start in the April quarter, with output growth gaining momentum as demand conditions improve. India’s overall economy also saw price pressures moderating further, with input and output charge inflation registering at the slowest since September 2017 and June 2017 respectively”.
Markit- “But as the service economy contributes a greater proportion to real GDP, and continued to be outperformed by its manufacturing counterpart, overall private sector growth was only modest and below the historical trend. Service providers remained optimistic about growth in the year ahead, although the expectations index slipped slightly from March’s reading”.
The market may be assuming that Indian inflation (headline CPI) could, therefore, slow further from March’s five-month low and close to the RBI’s medium-term target of 4%. That would allow the central bank to stay on hold until H2-2018.
But the elevated and sticky nature of the Indian core inflation, still hovering around/over 5% may be a big headwind for the RBI to maintain price stability and thus RBI may also take a hawkish hold stance in its June meeting. As Fed is going to hike in June again (2nd hike for 2018), RBI may not afford to stay dovish/neutral. As both Indian core inflation and growth (GDP) are now in the upper trajectory, RBI may also hike in late 2018.
On Friday, Nifty was supported by HDFC Bank, HUL, Adani Ports (analyst optimism after the report card), Indusind Bank, Tech-M, ICICI Bank, Gail, BPCL, HCL Tech, Power Grid and others by almost 22 points (22+0.42), while it was dragged by ITC, RIL, Axis Bank, HDFC (SEBI rejection of HDFC AMC IPO), Sun Pharma, Infy, Yes Bank, L&T, Bajaj Auto, M&M and others by around 87 points (66+21) altogether.
Overall on Friday, Indian market was helped by selected/mixed private banks, OMC (some fall in oil from recent high), while dragged by automobiles, FMCG, mixed techs, media, metals, pharma, PSU banks, energies, infra, MNC and reality, financials to some extent. Overall selling pressure was quite evident in the broader market.
On Friday, USDINR-I closed higher by almost 0.23% around 67.05, while Indian 10Y bond yield edged down by 0.08% to close around 7.728%.
Technical View (Positional-Nifty, Bank Nifty):
Technically, Nifty Fut-I (NF) has to sustain over 10740 for a further rally towards 10800/10840-10875/10935 in the short term (under bullish case scenario).
On the flip side, sustaining below 10720-10700 NF may fall towards 10635/10610-10570/10530 in the short term (under bear case scenario).
Technically, Bank Nifty-Fut (BNF) has to sustain over 25775 for a further rally towards 25850/25915-26050/26150 in the near term (under bullish case scenario).
On the flip side, sustaining below 25725-25675, BNF may fall towards 25500/25350-25150/25000 in the near term (under bear case scenario).
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