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Nifty Soared To 7-Months High On Modi Optimism, Lower USD And Positive Global Cues

Published 03/19/2019, 03:24 AM
Updated 09/16/2019, 09:25 AM

The Indian market (Nifty Future) closed around 11513.00 on Monday, surged by almost +0.37%, but it slips from the session high. Earlier it made a 7-month high of 11554.35 on “NAMO” optimism-the much better prospect of a mega-win in the forthcoming general election by the Indian Prime Minister Modi and lower USDINR, also at a 7-month low. Although, a lower USD is negative for Nifty earnings as almost 60% of Nifty earnings are now generating from exports, it’s positive for the overall Indian economy (oil/import oriented) and the broader market.

On Monday, Nifty Future slips from the session high of 11554.35 to a low of 11436.00 primarily on profit booking, discounting “Modi” win in the election to some extent and partly because of some reports of the death of Indian soldiers at the LOC in another heavy gun/artillery fire with Pakistan. On Friday, similarly Nifty Future slid from the session high of 11532.50 to a low of 11390.00 in the last half-an-hour sharp selling on a report that Indian air force and the military has finished a week-long “surgical strike” along with Myanmar military to demolish various terror camps on the Myanmar forest. Those Naga/Myanmar terrorists are allegedly supported by China.

There were also some reports that to “finish” the JEM chief Masood Azhar, India may use missiles or could try to launch another “Laden/US” like surgical strike on Pakistan territory in April (around election time). India was also readying 6-missiles to strike Pakistan soon after the release of the captive Indian pilot by Pakistan (to take revenge of his “harassment”) and in response, Pakistan also promised to take retaliation by 18-missiles. In other words, India and Pakistan were in the brink of an all-out war, but this was eventually avoided by the US as Trump, Bolton, and Pompeo took initiative to diffuse the situation and pursued Pakistan’s President Imran Khan to release the Indian air force (IAF) pilot without any pre-condition.

But the Indian PM Modi’s electoral prospect got more boost by some reports that despite confusions over various satellite images over the actual fate of the JEM terror camps “bombed” by the IAF and number of possible terrorists death in that JEM camp, the Pakistan army is not allowing any domestic or foreign media to those JEM camp areas in Balakot hilly/forest regions as there are still a significant number of dead bodies (around 200), which the Pakistan army was not able to decompose.

In any way, by these reports, the unofficial Indian government claim of around 250-300 deaths of JEM terrorists in the Indian surgical strike got momentum and the PM Modi’s electoral prospect also got brighter in various opinion polls. Earlier various Indian political parties were debating whether the IAF strikes 200 “trees” or “terrorists” in that surgical strike, in which there was no evidence of such large scale dead bodies.

The electoral prospect of Modi also buoyed by visible lack of unity among the Indian opposition parties and also lack of a credible opposition candidate for the prospective PM. Although now the whole of India is viewing the Indian PM Modi as the only political leader to fight Pakistan on the battlefield, there is still no such Modi wave like in 2014. The general people now also understand the politics of “Pakistan war” just ahead of the general election (as it was Uri surgical strike ahead of the UP election, the Kargil war/conflict in 1999 ahead of the general election, all under BJP/NDA).

So, although Modi is going to win at ease, it may be far lower than the 2/3rd majority required for the BJP alone or even with the NDA as in various states, there is no such “NAMO” optimism. Thus, regional parties will make some gain, negative for the overall Indian political stability and positive for some policy paralysis. India now needs a bold reform decision for near double-digit economic growth and also employment/wage growth and the ultimate thrust in consumer spending after the DEMO.

On Monday, there was also a report that India’s largest car manufacturer Maruti is cutting its production by as much as 26.8% (126 K units), showing that India’s high GDP growth narrative may be faltering, most probably spillover effect of DEMO and deleveraging.

As a reminder, India’s GDP growth was at +6.55% in Q4-2018, the slowest in six quarters. But four vital high frequency leading economic indicators (auto sector) related to various categories of the Indian economy showed that economic growth may have slowed down even further since January 2019. These four high-frequency economic indicators are 4-wheeler car sales (urban/city economies), 2-wheeler sales (semi-urban/small town/rural economy), tractor sales (rural/agri economy) and commercial vehicle sales (industrial economy). In February 2019, for the first time in four years, all the above four economic indicators were in negative territory on an annualized basis.

After a flat movement in the last 3-months with good volatility (10333.85-11118.10), Nifty jumped over +6% in March (till day) primarily on “NAMO” optimism and lower USDINR, which also lost over 3% in March (after FLAT February and 2% gain in January). USDINR was undercut by the better prospect of a mega-win for “NAMO” in the Indian election, subsequent huge FII inflows in the Indian equity market and some weakness in the US dollar for the concern of a dovish hold by Fed day after tomorrow (Wednesday, 20th March). Also, India’s recent composite PMI data was upbeat/better than expected.

The Indian market was also helped by banks & financials on hopes of another rate cut in April and by lower bond yields, positive for their huge bond portfolio MTMs. The Indian 10Y bond yield made a low of 7.452% in March from the high of 7.591% in February. Although, it’s much higher than the Dec’18 low of 7.218% as the corporate bond market is still fragile after some big corporate default fiasco. The Indian market was also undercut by higher Brent Crude oil which jumped almost +25% in the last 3-months (Jan/Feb/March-till now).

On the economic front, Friday data shows that the Indian trade deficit narrowed to $-9.60B in February from a higher deficit of -14.73B and was much lower than the estimate of -14.30B deficit as imports slumped from $41.09B to 36.26B, while exports edged up to $26.67B from 26.36B sequentially. A lower trade deficit is positive for the current account deficit.

On Thursday, data shows that the Indian WPI (equivalent to PPI) surged to +2.93% in February from prior +2.76% sequentially (m/m), and was also higher than the estimate of +2.88%. The higher WPI may an indication of higher inflation in the coming days, although it was accompanied by a surge in WPI inflation in foods and fuel. But a slump in manufacturing WPI from +2.61% to +2.25% in February may be also an indication of lack of pricing power by the manufacturers. As a GDP deflator, the higher WPI may be also negative for the GDP growth headline.

On last Tuesday (12th Match), data showed that the Indian headline inflation (CPI) was at +2.57% in February, higher than the January figure of +1.97% (revised downwards from +2.05%) and was also higher than the expectations of +2.43% (y/y). On a sequential basis, the headline CPI jumped +2.1% after falling for two straight months. The core CPI also edged down to +5.30% in February from prior +5.36% sequentially (m/m).

Overall, the Indian headline CPI accelerated in February for the first time in five months, as the fall in food prices was milder than in prior months. However, overall inflationary pressures continue to be weak, with core rate easing for the second consecutive month.

Although the Indian core CPI is still hovering around +5.00 to +6.00% range, well above the RBI’s target of +4.00% and is quite sticky, the new RBI governor Das (appointed as a favorite by the government) does not follow the core CPI as per current global norms in formulating monetary policies. The RBI now follows the headline CPI and being well below the target of 4%, RBI may cut again in April or by June policy meeting just ahead of the election or after the formation of the new government to kick-start the economy and help the MSMEs with a lower rate and better credit flow.

But at the same time, lower rate policy transmission by banks may be benign below +6.00% repo rate and considering surging NPA/NPL in the MSME segment, the April or June cut may be the last in the foreseeable future, although RBI may again change its stance to “accommodative” from present “neutral” mode; i.e. it may be a dovish cut by the RBI in April or in June.

Apart from a dovish RBI, Indian banks & financials were also boosted by talks of relaxation from the RBI for its 12th Feb’2018 NPA circular after an adverse judgment by an HC, although RBI later denied it. PSU banks were also buoyed by reports of upbeat NPA recovery.

Overall the Indian market was also boosted by positive global cues as the US stock market (S&P 500) also jumped almost +13% in the last three months (Jan/Feb/March’19) after a plunge of over -9% in Dec’18.

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