The Indian market (Nifty Fut/India-50) is currently trading around 10964.50 Monday, jumped by almost +0.34% on mixed global cues after a stable and expected set of economic data from China (GDP, Industrial productions and retail sales) coupled with growing optimism about the US-China trade truce progress.
But Early Monday, the “risk-on” trade was under some stress on a report that despite growing optimism story about the US-China trade truce progress, on the vital issue of IP protection, there is absolutely no progress as reported by the US Treasury to the US Congress. China officials have denied such IP theft allegation and asked the US for proof.
Subsequently, the US future SPX-500 dropped over -0.30%, while Europe also slumped around -0.40%. But China and Hong Kong recovered from an earlier slump on a stable set of economic data and hopes of China stimulus as ultimately China’s 2018 GDP came at +6.60%, the lowest in last 28-years.
Following rebound in China/Hong Kong markets, the Indian market also made a recovery from the session low of 10902.15 after opening around 10930.05, almost flat; Nifty future made a session high of 11003.45. The recovery in the Indian market was mainly supported by Reliance (RIL) amid an upbeat report card for Q3-2018, higher oil (as oil bounced back over 18% in January till date-positive for RIL’s inventory MTM and strong refinery/diesel demand from China despite an economic slowdown).
Also, higher USDINR is positive for exporters like RIL, IT/Techs/Pharma and almost 60% of Nifty earnings are now coming from exports. In line with global trends (higher US dollar index for European political jitters, progress in US-China trade truce story), USDINR also bounced back by around +2.50% in January (so far) against almost 4% plunge in Q3-FY19 (Oct/Nov/Dec-18).
Apart from favorable global cues and higher oil, USDINR was also boosted by the perception that India may not be able to adhere to the fiscal deficit target of 3.3% in FY-19 (March-19) due to growing political populism ahead of the election to stay in power by offering subsidized welfare and loan-waiver schemes from farmers to MSMEs to middle class earners (income tax limit hike). Both federal as-well-as state governments are now thriving to woo voters and launching various social welfare/security schemes at the cost of fiscal discipline.
In brief, the Indian Federal government may unleash a fiscal stimulus package of around Rs.3T alone in the forthcoming budget on 1st February (vote on account/policy vision document) before going to an election in May-June-2019. As the GST/net revenue collection could fall short by around Rs.1T, the Federal government is pressurizing the RBI (central bank) for additional dividend by almost the same amount of revenue deficit (in phases).
As per ICRA, the Indian arm of Fitch, India’s combined fiscal deficit of Federal and state governments may scale 6.5% in FY-20 vs the estimate of 6.3% in FY-19. Thus, Indian states could borrow net Rs.4.2T through market borrowings in FY-20 vs Rs.3.8T estimate in FY-19. In January so far, the Indian 10Y bond yield jumped to 7.650% from the Dec’18 low of 7.218%.
The market is now expecting that RBI may change its policy stance in the forthcoming meeting (7th Feb) to “neutral” from so-called “calibrated tightening” under the new RBI governor, who is seen as “friendly” with the Federal government. The main reasoning for going to “neutral” mode would be lower headline CPI at +2.19% in December from prior 2.33% a month ago. The market is also expecting a rate cut in April/June policy meeting. So the February policy meeting may be termed as “dovish hold”. Some market participants also see a rate cut even in February.
But the Indian core CPI continues to hover around +6% and in December, it scaled +5.7% in December and the sticky nature of core CPI around 6% for the last few quarters may be due to consistently higher education, housing and healthcare costs, which are structural in nature (lower supply than demand and lack of social security in India unlike in the DMs-can’t cure by the RBI/central bank monetary policy). But, at around 6% core CPI, 7% GDP growth, the Indian economy is still running “quite hot” by any global/EM standard and thus no central bank including RBI will cut in such scenario.
Apart from economics, all eyes will be also on the Indian politics as the nation is already on the general election mode. In brief, in the absence of any “NAMO” (Modi) wave unlike in 2014 (anti-establishment politics), India is likely going for a minority government, dependent on various small regional parties.
True, NAMO is still the most preferred choice (almost 45%) of PM in the absence of any other credible political leader having all-India acceptability, but this time NAMO have to depend on various political permutations and combinations to be the next PM.
On the other side, INC’s “RAGA” (Rahul Gandhi) is now enjoying around 25% public support to be the next PM, thanks to the recent state election success amid farmer’s woes (India’s high borrowing costs and debt trap). But the biggest disadvantage for RAGA will be various corruption allegations against his Gandhi family and lack of any proven administration skill in the past (unlike Modi as Gujrat CM) coupled with the uneasiness of other regional political parties to accept him the opposition PM candidate.
In such a scenario, we could see West Bengal’s popular CM Mamta Banerjee or Andhra Pradesh’s CM Chandrababu Naidu as the PM face (candidate) for the opposition “United India”. All these political permutations and combinations could affect political stability and policy decisions in the coming days. We could see “policy paralysis” again in India. if NAMO failed to win conclusively in a big way in 2019.
Technical View (Nifty, Bank Nifty, USDINR)
Technically, whatever may be the narrative Nifty Fut-I (NF) has to sustain over 11075 for a further rally to 11130*/11205-11245/11315 and 11405/11495-11620/11785-11825 in the near term (under bullish case scenario).
On the flip side, sustaining below 11050-11010, NF may fall to 10900*/10840-10800/10750 and 10660/10575-10500/10350 in the near term (under bear case scenario).
Technically, Bank Nifty Fut-I (BNF) has to sustain over 27800 for a further rally to 27880*/27945-28175/28410 and 28465/28550-28800/29100 in the near term (under bullish case scenario).
On the flip side, sustaining below 27750-27650, BNF may again fall to 27400*/27200-27050/26700 and 26400/26250-26000/25700 in the near term (under bear case scenario).
Technically, USDINR (spot) has to sustain over 70.80 for a further rally to 71.50/71.75*-72.00/72.75 and 73.05/74.00-74.50/76.05 in the near term (under bullish case scenario).
On the flip side, sustaining below 70.45, USDINR may fall to 70.10/69.75*-69.10/68.45 and 67.85/66.95-66.40/65.70 in the near term (under bear case scenario).