The Indian market (Nifty Future) closed around 11086 Wednesday, surged almost +0.48% and well-off the panic low around 10730 made soon after the Indian surgical air strike on alleged Pak terror camps on 26th Feb. On Wednesday, Nifty Future closed near the session high of 11094.50; earlier it made a low of 11033.05 following European market volatility.
After just one day of India’s unprecedented surgical air strike on Pakistan, the later also tried to carry out a similar surgical air strike on some oil installations near an Indian army camp along the Kashmir LOC, "quite unexpectedly". But the arrest of an Indian Mig-21 pilot by Pakistan army after he was forced to eject out of his crashing fighter jet amid an intense “dogfight” with a Pak F-16 (also claimed destroyed by the Mig-21 pilot) was perhaps “out of script” of the Indian policy makers/politicians, bringing the two sides on the brink of an all-out war.
Again, India’s matured diplomacy and Pakistan PM’s “gesture of peace” (under immense pressure from all sides) ensured a speedy release of the captive Indian pilot within 2-days (after lots of political and media drama), which is being seen as a major “victory” for India and the PM Modi.
Also, after “retaliation” with 24 F/J-16 fighter jets in “broad daylight” against India’s “aggression” of 12 Mirage-2000 (“in the dark of night”), Pakistan political/military establishments as-well-as domestic audience are now “highly satisfied”. The same is true to the other side of the border (India), where nobody is now talking about economics and other vital issues ahead of the general election, but only about the “surgical strike”.
Although, there are serious doubts about the actual impact of the Indian “surgical strike” and “the whole nation” is debating, also “wants to know” the veracity of the same, one thing is clear that the Indian PM Modi is now far ahead of his combined opponents amid a wave of “nationalism” despite issues of unemployment, DEMO and some other anti-incumbency factors.
And after the “one & done” surgical strike by both sides, the Pakistan PM Khan is now busy with arresting UN banned Pak based terror organizations and he may also arrest or kill Masood Azhar, the mastermind of the JEM. For Khan, it’s now an ideal time & opportunity to destroy the Pak terror network, ISI and reform the military, which is the main force behind such proxy war on India and certain other countries. Khan now needs huge FDI for Pak economy to stay afloat and thus Pakistan now needs stable geopolitics without supporting to terror organizations or non-state actors.
For India, the PM Modi clearly said that India will attack and kill Pakistan based terrorists by “entering in their home” if there is any further terror incident backed by such Pak based terror organizations. In other words, India will only “attack” Pakistan or carry out a similar surgical strike if again attacked by any Pak based terror organizations.
So, the “one & off” surgical strikes by both neighbors are now over for the time being (till at least next major Indian election under BJP/NDA government.) And Modi/BJP and other political parties will now have to fight the election on this Pak surgical strike” platform. We have seen this trend during Kargil war (in 1999, ahead of a general election under BJP government amid anti-establishment wave/no major issues) and also during Uri surgical strike (ahead of the important state election of UP after DEMO).
The market is optimistic that Modi will win the election with ease after this surgical strike on Pakistan, although this may not be the landslide victory (the 2/3rd majority by BJP itself) like in 2014 amid “NAMO”/anti-establishment wave. At the same time, the market is also confident that there will be no major flare-up of India-Pakistan border tensions or any further surgical and counter surgical strikes.
The borderLOC skirmish (shelling and firing by both sides) between Ind-Pak is a legacy issue, going on for decades, probably a “live war game” between the two neighbors to satisfy the domestic political audience rather than solving the issue permanently with some compromises from both sides.
In any way, the lack of “credible” opposition leader as a PM candidate in the “united opposition”, acceptable to whole India and the “nationalistic” platform for Modi with impeachable political maturity and leadership quality, it’s now almost certain that Modi will be in the South Block for another 5-years. And the market is getting a boost, although it may not be great as earnings and some other macros are not great either.
Also, various regional parties, unemployment, DEMO pain and growing debate about the actual impact on Pak based terror organizations after India’s surgical strike, which may be largely “political” in nature could limit Modi’s landslide victory.
From geopolitics to economics, Indian GDP grew by +6.6% in Q3FY19, down from +7.1% sequentially and also lower than the expectations of +6.9% on annualized basis. The sudden slump in GDP growth is primarily because of a change in GDP calculation methodology (base effect) coupled with subdued private consumption, a slump in net exports and muted domestic demand (spillover effect of DEMO). In Q3, government spending (capex) also eased, while private capex (investment spending) surged to some extent. Agri and service output was muted, but industrial growth led by mining and quarrying supported the Q3 GDP to a large extent.
Overall, this is a soft landing for the Indian economy and the Q4 GDP growth could be also on the softer side and all-in-all, the market is now expecting the average full-year GDP growth around +7.0% (FY19).
There was also another private report that in Q4, the Indian unemployment rate is hovering around 7.2% with declining participation rate. There is no official (credible) job data (like NFP in the US) in India despite over 95% of the Indian people now have a UID card and the country is technologically advancing at a rapid state with cheap mobile data.
Although, the government/RBI has no official mandate like maximum employment and stable price (inflation) in India (unlike in the US/Fed), RBI may be compelled to cut again in April to bring the Indian repo rate back to +6.00% again (after two hikes by the previous RBI governor Patel just few months ago) ahead of the election to “revive” cheap credit flow to the MSME, private consumption as-well-as to push private capex (investment).
In brief, the government/RBI will ensure a dovish or easy monetary policy and the never-ending OMO (Indian version of QE) to stimulate the economy further despite its running “hot” as per the global standard (GDP growth around +7% and core inflation around +6%).
But the RBI now does not “recognize” the high Indian core inflation (under the new governor Das) and thus may cut again in April with a change in its policy stance from “neutral” to “accommodative” again to counter slowing growth and low headline inflation.
Although, RBI may not cut in April successively after cutting in February as it’s very rare for the RBI to take policy action in two consecutive meetings, but the RBI may cut under the new governor Das to “spur” the economy just ahead of the election (lower rate of interest for mortgage/personal/MSME loan). The new RBI governor Das is a “peace-loving” bureaucrat, basically a “yes man” of the government without any confrontation with his political boss unlike some of his predecessors (on DEMO, PAC, NPA issues).
In any way, if the RBI does not cut in April for any election code violation issue/allegation, then it will certainly cut in June. But that may be “one & off” as Indian banks may not be able to cut their respective lending/base rate further even if RBI goes below 6% as Indian small savings deposit rate is still higher. Banks can’t afford to lower their deposit rate significantly below that of small savings rate and thus can’t lower their corresponding lending rate also.
The high savings rate is a legacy issue of the Indian economy amid little social security program by the government (unlike in the West/DM) and little financial literacy among the masses (for looking alternative avenue for higher returns on their savings). The high small savings rate in India is also a political issue, which no government has the will to reform despite huge political stability and thus the overall economy still remains a “high cost” (higher borrowing costs, higher core inflation) with very low productivity ( especially in the PSU sector).
Overall, Nifty closed almost flat (-0.36%) in February with fair volatility; it made a monthly low-high of 10585.65-11118.10. In March, Nifty jumped almost +2.41% (till now) in hopes of a blockbuster win by Modi coupled with hopes of another RBI cut. Also, upbeat manufacturing/service PMI helped along with mixed auto sales for February.
On Tuesday, the Indian market was helped by banks & financials (on hopes of further RBI cut), FMCG, techs/IT, metals, pharmaceuticals, reality/real estates, energies, and infra, while dragged by automobiles, media and MNCs (lower USD) to some extent. The rally was quite broad-based amid renewed buying interest in mid/small caps. Nifty was helped by RIL, ICICI Bank, HDFC, ITC, and Bajaj Finance, while dragged by Axis Bank, HUL, Tata Motors (fading China trade truce optimism and JLR issue), Maruti and ZEEL.
The 10Y Indian bond yield made a high of 7.699% in February and is currently trading around 7.58%, while USDINR made a high of 71.845 in February, and is currently trading around 70.20.
Technical View (Nifty, Bank Nifty, USDINR)
Technically, whatever may be the narrative Nifty Future (NF) has to sustain over 11175 for a further rally to 11205*/11250-11315*/11395 and 11425*/11460-11495/11525* in the near term (under bullish case scenario). On the flip side, sustaining below 11155-11115, NF may fall to 11030*/10980-10930*/10840 and 10790/10715*-10690/10630* in the near term (under bear case scenario). Technically, Bank Nifty Future (BNF) has to sustain over 27825 for a further rally to 27925*/28125-28305/28395* and 28450/28600*-28805/29075* in the near term (under bullish case scenario). On the flip side, sustaining below 27775, BNF may fall to 27630*/27450-27250/27050* and 26850/26650*-26500/26400 in the near term (under bear case scenario). Technically, USDINR has to sustain over 69.90 for a rebound and further rally to 70.60*/71.05-71.75*/72.05 and 72.65/72.90-73.35/73.75 in the near term (under bullish case scenario). On the flip side, sustaining below 69.65, USDINR may further fall to 69.25*/68.90-68.15*/67.50* and 67.00/66.60-66.25/66.00* in the near term (under bear case scenario).
India 50
Pivot: 11175 Support: 11030 10980 10930Resistance: 11205 11250 11315 Scenario 1: Strong above 11175 and sustaining above 11205*/11250-11315*/11395, Nifty Future may further rally to 11425*/11460-11495/11525* in the near term Scenario 2: Weak below 11155-11115 and sustaining below 11030*/10980-10930*/10840, Nifty Future may further plunge to 10790/10715*-10690/10630* in the near term Comment: Short term range: 10580-11155
Pivot: 69.9 Support: 69.25 68.9 68.15 Resistance: 70.6 71.05 71.75 Scenario 1: Strong above 69.90 and sustaining above 70.60*/71.05-71.75*/72.05, USDINR may further surge to 72.65/72.90-73.35/73.75 in the near term Scenario 2: Weak below 69.65 and sustaining below 69.25*/68.90-68.15*/67.50, USDINR may further plunge to 67.00/66.60-66.25/66.00* in the near term Comment: Short term range: 69.25-72.05