Nifty Closed Almost Flat After A Bout Of Volatile Consolidation (distribution?) Supported By FMCG, Pharma & Telecoms; But Dragged By Banks Following RBI Sucks Up Excess Liquidity Due To Demonetization Deposits

Technically, NF (8143) need to sustain above 8175-8210 zone for further rally towards 8260-8345 area; otherwise, this may be again proved as “dead cat bounce” and sustain below 8130-8095 area , NF may fall towards 8075-7995 & 7960-7900 zone in the near term.

Market Wrap: 28/11/2016 (17:30)

Nifty Fut (Dec) today closed around 8143 (+17 points), almost flat (+0.21%) after a volatile trading day, which saw an opening session low of 8088 and late hours high of 8168.

Today Indian market opened in negative tone following tepid global cues and another fresh domestic headwind in which RBI decided to suck up the excess liquidity of around Rs.3.24 lac cr from the Indian banking system after huge surge in demonetization led deposits in old currency notes.

But, soon after opening, domestic market covered some of shorts, especially in the banking stocks and together with that some value buying or more short covering in some of the leading FMCG, Pharma, Telecoms and cement stocks, which were heavily beaten down in the last couple of trading sessions has helped the market to end in a slight positive bias.

Although, the surprise (?) CRR hike on the incremental demonetization deposits may be negative for the bank stocks, as they are now not in a position to take the advantage of taking deposits at lower rate (4%) and lend the same to RBI for higher rate (6.2%) on this incremental deposit in the reverse repo window. As most of the banks has already cut various deposit rates as well as MCLR (base lending rate) assuming incremental flow of greater liquidity in the system at lower cost as a result of demonetization led deposits, this weekend RBI move can hurt their NIM.

On the other side, some analysts are also seeing this RBI move to hike CRR by 100% for the demonetization excess deposits as net positive for the banking sector in the long term after the appropriate action by the Apex bank for financial stability of the banking system.

The perception is that after the announcement of the demonetization, there is huge inflow of bank deposits, while very little withdrawals due to various reasons and actual shortage of existing valid currency notes. Thus, banks are literally sitting on huge deposits of around Rs.8 lakh cr as on last week. As par RBI regulation, banks have to keep aside 4% of this as CRR and also have to buy G-SECS (Govt bonds) for around 21%. The rest of the deposits can be used for lending purpose. 

Now, the ground situation is that there is no real demand of credit as most of the Indian corporates are already stressed and there is lack of adequate demand with high rate of capacity un-utilization. The sudden “surgical strike” on the black/unaccounted money may have helped to curtail that demand (consumption) by at least 30-40% even in the long run. The demonetization led disruptions and the resulting cash flow mismatch may have also dented the sentiment of the MSME(s) and may have even affected the confidence of the retail borrowers. Thus, in the near term there may be no takers of any loan even if banks transmit a good portion of RBI rate cuts or RBI cuts more (growth in bank lending may be muted going forward).

Also, banks are now forcing to buy G-SECS on an incremental basis almost every day for the 21% SLR requirement. This, in turn helping the bonds to rally and yields were going down to an unrealistic level along with the surging US bond yields as a result of “Trumpism” and hawkish Fed (strong USD). 

Thus, the attractiveness of the Indian bond yields are falling and FPI(s) are exiting Indian market as it was an attractive destination for them in search of high yields with a safety in the world of NIRP/ZIRP or Near Zero Interest policy (negative, zero or slight positive yields for global bond markets). Incidentally, Rajan was the “darling” for FII(s) for his hawkish stance and this positive Indian bond yields. 

Now, the global, especially US bond yields are rising and if Indian bond yields kept falling after demonetization, the situation may become worse. For an economy, stability of bond market may be more important rather than stock market flows, because it may be the prime funding source for Govt deficits & fiscal spending.

Another point may be that, actually, RBI is short of G-SECS against the deluge of demonetization led deposits and thus sucking out part of it (for around Rs.3.25 lakh cr) is a right step as eventually, it can protect the banks from the huge capital loss out of depreciation in G-SECS.

As par some estimate, this absorption of liquidity may cost the banks around Rs.700 cr as two weeks interest difference from reverse repo & deposits, but at the same time it may protect them for a notional capital loss of Rs.50000 cr (assuming 2% loss on total SLR of the banks at around Rs.25 lakh cr on an overall deposits of around Rs.100 lakh cr). 

Thus its prudent for the banks to take a much smaller interest loss now than to take huge capital loss later as ultimately, the demonetization led excess deposits may start to withdraw by a significant portion, when normalcy is expected to return around Q4FY17. 

As par last week figure, the net surplus in demonetization led deposits may be around Rs.5.3 lakh cr against available G-SECS of around Rs.7.5 lakh cr, that RBI can offer to banks. 

There is also significant shortage of MSS bonds with RBI, but they have taken some steps in this direction also today, although, in a very small amount compared to the overall liquidity of the system.

Another reason may be that because of huge liquidity in the system after demonetization, USDINR is also appreciating as bond market is also assuming prompt rate cut by the RBI. By this CRR action to suck up the excess liquidity from the Indian banking system to keep it as “liquidity neutral” as par RBI monetary policy, RBI may want to sent a signal to the market that it may not be in a hurry to cut repo rates in Dec’16.

Thus, in an uncertain economic environment after the demonetization, RBI may focus more on the prudent risk management in the Indian banking system (financial stability) and Fed’s actual rate action in Dec’16 along with any future guidance, rather than a simple inflation/growth dynamics.

The risk of a sharp GDP decline in the near term may prompt RBI to be on an accommodative stance in the short term and may even indicate a rate cut of 0.25-0.50% in Feb-Apr’17 & H2FY18, but in Dec’16, RBI may stand pat to wait for the actual impact of demonetization on the broader economy, inflation curve and Fed’s stance.

RBI may give more focus on “productive & agri loans” (rural economy) by the banks and full transmission of the previous rate cuts (1.75%) as there is no lack of liquidity in the system, especially with the PSBS after the demonetization.

As hopes of any rate cut in Dec’16 has virtually doomed as a result of “Owlish” Patel (RBI), banks and rate sensitive stocks may react more in the market, which is already under tremendous pressure as a result of demonetization and declared “war on black money”.

Globally, US bond yields as well as US EQ market was under pressure as on weekend, there was a report that some of the election losers including Clinton may go for a recounting in some of the areas of recently concluded US elections. Although, chances are very slim for an overturn of the US election result, some of the tweets made by Trump in response to this overall recounting episodes and winning of popular votes in favour of Clinton by more than 2 mln votes may have made the market jittery about the mental stability of Trump as a US President.

Trump tweeted that, Clinton received 3 mln illegal votes in an unprecedented manner without any supporting proof as an incoming President which may be unheard in US politics so far. His tweet about Castro after the death on weekend was also a new low in US politics. Thus the present “Twitter Tantrum” from the President-elect Trump may be seen as an act of immaturity/inexperience as a Political leader and if such immaturity continues as “President” after taking charge of the Oval office, it may cause significant disruptions in the US as well as global financial markets, because market may assume that “President Trump” will try to keep at least half of his election rhetoric as “Candidate Trump”. Already, “America First” notion is taking its toll for the Indian IT companies as they are taking more “Americans”, which may cost them incrementally higher.

In the last few weeks the “Trump Tantrum” has caused significant melt down in the EM currencies including India. Now, after taking charge, any immature “Twitter Tantrum” may also cause more headwinds for the “risk assets”.

Global market may also be on the edge this week with Italy & Austria are going for referendum/poll and given the recent rise in nationalistic politics after “Brexit” & “Trumpism”, EU politics, especially France (Frexit?) may also pose greater risks for the global as well as the Indian market.

Thus, global market, especially US market may correct significantly as a result of US & EU political risks and hawkish Fed, despite talk of “Trumponomics”. Apart from Dec’16 rate hike, Fed may guide at least two rate hikes in 2017 (June & Dec).

Technically, SPF (2207) need to sustain over 2215 for a near term target of 2235-2260; otherwise it will come down again towards 2190-2145 in the days ahead.

 SGX-NF

 SPF

Nifty May Be Under Renewed Pressure After Opening Lower (-0.50%) Amid Negative Global Cues & Weekend Surprise (?) Action Of RBI To Suck Excess Liquidity From The Banks As A Result Of Demonetization Led Huge Deposits

Watch 8060*-8000 & 8115-8155* Zone In Nifty Fut (Dec)

Market Mantra: 28/11/2016 (08:30)

As par early SGX indication, Nifty Fut (Dec) may open around 8080 (-39 points) following negative global cues & weekend surprise of RBI action to suck up excess liquidity from the Indian banking system as a result of demonetization led huge inflow of deposits in old currency notes.

USD is under some pressure as market may have some second thought about reality of “Trumponomics” and its design (funding, ultimate congressional approval etc) and weekend “Black Friday” retail sales figure. Technically, USD was also in very overbought condition and that may be one of the prime reason also for the correction.

Oil was also under pressure in the late weekend trading as a Saudi Arabia may not attend the Vienna meeting at all amid continuing OPEC squabbling. Saudi Arabia now sees natural Oil rebalancing in 2017 as demand may increase significantly from the US.

Back to home, when India was debating about effectiveness about the demonetization, which is fast turning into a full blown political battle, RBI made CRR 100% for the incremental bank deposits in an unexpected (?) move on the weekend. This may suck up liquidity for around Rs.3.50 lac cr from the banks and may be significantly negative for their NIM, as they have already lowered some of their deposit rates and MCLR.

Although, this move of the RBI may make the GSEC bond yields higher and INR may  also gain some strength today supported by falling dollar index, overall excess liquidity with the Indian banks mat also reduce dramatically.

Apart from RBI repo rate cut, savings/deposit rate and overall liquidity in the system may be the other prime factors for the banks to transmit incrementally lower rate into the economy (borrowers). With this RBI move to suck up excess liquidity in the banking system to make it “neutral” as par its monetary policy, benefit of lower rate in the economy may be shattered in the near future.

As a direct fall out of demonetization and “war on black money”, informal lending  & credit system with the Indian economy has virtually collapsed, especially at the bottom level of rural economy (agriculture, SME etc) and under the scenario of less banking activities of lending & borrowing in the economy by the banks may be worse.

Technically, NF (8080) has to sustain over 8115* zone for further rebound towards 8155-8185* & 8210-8260* area for the day (bull case scenario).

On the other side, sustaining below 8060-8045* area, NF may further fall towards 8000*-7960 & 7915*-7880 and further 7805-7675* zone for the day (mild to extreme bear case scenario).

Similarly BNF (18553) has to sustain above 18650* area for any up move towards 18750*-18900 & 19050*-19300 zone for the day (bullish case scenario).

On the other side, sustaining below 18400* zone, BNF may further fall towards 18200*-18100 & 17850-17700* area for the day (bear case scenario).

SGX-NF

Nifty Soared By More Than 100 Points In An Oversold Market As USD Retreat On The Back Of Falling US Bond Yields & Heavy RBI Intervention (?) And Closed The Volatile Week Marked By Demonetization Led Chaos By Almost 0.50% Higher

What’s for the next week ?

Technically, NF (8119) now need to stay above 8145-8185* area for further rally towards 8270-8355-8475 zone.

Otherwise it may again fall and sustain below 8115-8065* zone may further fall towards 8000-7960-7900 & 7810-7675 area.

Market Wrap: 25/11/2016 (17:30)

Nifty Fut (Dec) today closed around 8119 (+1.32%) after making a late session high of 8139 and opening session low of 8006, helped by short covering & some value  buying, especially in Pharma, IT and some banks. But cement and consumption sectors are continuing under pressure. There was some report that cement prices drop in Western India following demonetization led “cash crunch”.

Indian market today opened as flat following positive global cues marked by some drops in US bond yields in an extremely overbought market after “Trump Rally”. The domestic market sentiment got a boost after USDINR dropped by almost 0.50% following suspected heavy RBI intervention and some long profit booking in the USDINR forward contracts. Still, USDINR-I has closed above 68.25 and technically, consecutive closing above it may invite 69.25-70.50 in the near term. Divergence in Fed & RBI monetary policy, bond yield & interest rate differentials, demonetization after shock and expected huge redemption pressure on FCNR & FCCB (around $16 bln) may be some of the reasons behind strong USDINR apart from “Trumponomics”.

Having said that, “Trumponomics” may have its own funding issues as till date, there is no clarity about source of huge fiscal/infra spending under Trump administration for around $1 tln in 10 years (almost 1% of US GDP). Will it be Fed’s “free money” or funded by bond investors from Japan/EU/China/Saudi Arabia? Most probably it will be the 2^nd sets of investors, who may fund it along with US Govt (PPP mode). But in that scenario, Trump has to be dependent on continuing dovish monetary policy by BOJ & ECB and may also be not in a position to irritate China & Saudi Arabia either because they are holding significant US debts (bonds). 

On the other side, after “Brexit” & “Trumpism”, nationalism & anti-establishment politics are on the rise in EU, especially Italy, France and even Germany may be affected in the days ahead. Thus, policymakers and politicians are now increasingly looking for this “Trumponomics” model of more fiscal/infra spending to spur GDP, inflation and employment instead of incremental QQE (monetary stimulus).

Thus, days of incremental QQE or 24/7 money printing may be over and this may make EM currencies extremely vulnerable and India is also not an exception for this out flow, despite being a “sweet spot” in the global economy with its appeal of 4-D (democracy, demography, development & demand) & “Modinomics”.

It’s true that the near term impact of demonetization will be sharp both on demand (consumption) & production, but may be gradually return to normal by next 3-6 months (medium term) and there may be some steep fall in the FY:17-18 GDP & corporate earnings. But, the consistent script of “war on black/unaccounted money” in the system (both formal & informal) by the Govt may put the “demand” factor in serious question, even in the long term as traditionally Indian consumption story may be significantly dependent on this “black money”. In this regard, UP CM’s comment that “India was able to beat the 2008 recession period for this black money” may not be wrong at all (some economists/analysts may have told this to the UP CM).

There is some perception that over the course this “informal economy” may add to the “formal economy” and will be positive for India’s GDP in the long term. Moreover, RBI may cut 0.75-1.00% over FY: 17-18 and with that Govt may also be in a position for a massive fiscal stimulus because of lower currency liability, net savings & spread. Depending on the overall quantum of net savings, Govt may spend over infra, defence, rural, tax sops and even bank recapitalization. Govt is also exploiting two types of VDS for the current demonetization with 60% tax plus fine or 45% tax with four years of lock-in period for the huge amount of suspected undeclared “black money” deposited in the bank accounts.

In other words, as an indirect result of this demonetization “reform”, Govt may have a windfall gain and will be in a better position to spur growth in future by spending (Govt capex).

But till date as par some reports, Govt may have already incurred an expenditure of around Rs.1.50 lac cr for this demonetization drive against net CASA of around 5-6 lac cr. Going by the present scenario, it may take another 1-2 years for scanning of all the undeclared cash deposits by the Income Tax department and then raise demands and actual collection. Thus, it may take at least 3-5 years for such expectation of huge fiscal stimulus to be a reality, everything being equal.

Another probability is that, Govt may introduce some kind of direct banking transaction tax for this “undeclared” cash deposits and make an instant windfall gain. But, in that scenario, pubic trust on the banking system & currency may be also crashed and it may invite a huge political backlash also.

Also, simple rate cut by the banks/RBI may not work well for the economy as there is lack of sufficient demand and bank credit. Govt has to create an environment of more demand in the formal economy and for that appropriate job creation may be vital and quite challenging too.

Another point is that because of this demonetization led chaos & cash crunch on the ground level, food inflation has increased significantly, primarily due to demand & supply mismatch, despite favourable seasonal factor.

If such condition of acute cash crunch persists for another 3 months, in the ground level, where digital economy does not work, then this incremental food inflation may become another political headwind for the Govt/BJP in the forthcoming series of state elections.

Thus, higher food inflation, higher combined fiscal deficits & CAD, capital out flows, implementation of GST, EU political risks and continuing tensions at PAK-LOC may be some of the headwinds for the Indian economy in the near term despite expected tailwinds of “windfall gain” & huge fiscal stimulus as a result of demonetization and overall collateral damage to the economy may be much more than the intended benefit.

 SGX-NF

Nifty May Open Flat Supported By Positive Global Cues (Japan/US) In A Holiday Thinned Market; But May Be Under Continuing Pressure Amid Surge In USD And Demonetization Led Domestic Jitters & Other Headwinds

Watch 8000-7920* & 8050-8090* Zone In NF

Market Mantra: 25/11/2016 (08:30)

As Par early SGX indication, Nifty Fut (Dec) may open around 8030 (+20 points) after overnight rally in US stock Futs and morning positive Asian cues. Nikkei-225 (Japan) is trading strong as a result of weaker Yen. In the morning, USDJPY gained more strength after Japanese CPI disappoints. Also, US stock Futs are trading at life time high as “Trump Rally” continues amid hopes of more fiscal spending & tax cuts, which may both spur US GDP & corporate earnings growth along with surge inflation & more job creation. 

As USD is getting stronger, almost all the EM & Asian currencies are under pressure; but weaker Yen & Yuan are making both Japanese & Chinese market stronger as both the economies are primarily export oriented. Having said that, Chinese Yuan are trading now around 6.95 and any further devaluation towards 7.25 may cause significant global headwinds for the risk assets as seen in 2015.

Although, India, as a domestic consumption story with little contribution of export on the overall GDP of the country, may be insulated partly from any real global shocks, consistent USD strength may cause significant fund outflow from the FPI(s). 

USDINR is expected to rally towards 71 level despite RBI intervention on the divergence of USDINR bond yield spreads, interest rate differentials and probable out flow of around $16 bln (FCNR & FCCB redemptions) in the coming days.

Also, the present scenario of both short & long term impact of demonetization and “war on black money” on the Indian GDP, domestic consumption and corporate earnings recovery may have made FII(s) jittery about the domestic market.

As a result of demonetization led political chaos and “war of words” may also delay the final passage of GST bill and implementation of the same from April’17 and in that scenario, because of series of state elections, GST roll out in Sep’17 may be also looking doubtful. Eventually, GST may be also postponed until 2019 general election.

The domestic market sentiment may be also affecting due to ongoing tensions at LOC (Pak) in J&K, which may turn into serious all out war at any point of time due to domestic pressure & political compulsions of both the countries.

Technically, NF has t sustain over 8050* area for further rebound towards 8090*-8160 & 8210-8290* for the day (under mild to extreme bullish scenario).

On the other side, sustaining below 8000* zone, NF may further fall towards 7960-7920 & 7880-7810* area for the day (under mild to extreme bear case scenario).

Similarly, BNF (18392) has to sustain over 18450* area for 18600*-18760 & 18850-19070* zone for the day (under mild to extreme bull case scenario).

On the other side, sustain below 18350* zone, BNF may further fall towards 18200*-17950 & 17750*-17450 area for the day (under mild to extreme bear case scenario).

SGX-NF

 BNF