The Indian market (Nifty Fut/India-50) closed around 10944 Friday; plunged almost -1.35% on RBI credibility after a surprise rate cut by 4-2 votes on Thursday with a dovish stance ahead of the general election. The market is now expecting that the Indian central bank (RBI) may again cut in its next policy meeting in April to bring down the repo rate to 6.00%, just ahead of the general election in May-June to help the government in the election by lowering borrowing costs (bank rate); especially for the MSMEs, farmers and retail loans.
The new RBI governor Das may be contra to Fed’s chair Powell, who despite severe political pressure from Trump, kept Fed’s independence, whereas Das failed to do so amid intensified political pressure from the NAMO government to turn dovish and extend another wave of monetary stimulus in addition to additional fiscal stimulus launched by the government in the recent budget for an economy, which is already growing by over 7%. The Indian bond yields are gaining strength after the RBI as the institutional credibility is now at stake and the government fiscal disciple roadmap is also under doubt.
In order to justify the cut, Das trashed the core inflation concept, which is quite high around 6% and resorts to the headline CPI around 2% due to lower vegetable food prices and fuel. The market was surprised that a central bank is cutting the rate based on headline CPI (lower vegetable food prices and fuel) rather than core inflation, which is now a global standard.
This marks a sharp reversal of the RBI monetary policy from “calibrated tightening” to “neutral” and rate hikes (+0.50%) to rate cuts (-0.25%) in a span of just a few months. The flip-flop is very unusual for a major G-20 central bank like RBI. In brief, the RBI was dovish on headline inflation (CPI) and economic growth (GDP) and thus delivered a cut.
Already, various PSU banks including SBI has cut their PLR/base rate and is expected to cut more ahead of the election, despite it may affect their NIM as transmission of lower RBI repo rate would take some time and the actual cost of funds for the banks depend on various other factors including bond yields apart from the RBI repo rate.
Although the RBI cut on Thursday surprised the market to some extent, it was not totally unexpected as there was already a rumor in the market on Wednesday itself RBI may cut as the new RBI governor, Das is a known (uber) dove and appointed by the government as a “yes man” after the resignation of two governors in the span of last 2 years (Rajan in 2016 and Patel in 2018) under the present NDA/BJP government for differences with the NAMO government on some bellicose policies.
The market was already expecting on Wednesday amid marathon RBI meeting (3-days against Fed’s 2-days) that to support slowing growth (as evidenced by some high-frequency data) and to boost credit growth, the RBI may cut in February itself under 1st chairmanship of the new RBI governor Das rather than in April or June (as earlier expected).
As a reminder, earlier the market was expecting a dovish hold in February with the change to “neutral” stance from prior “calibrated tightening”, considering still elevated core inflation in India hovering around +6% and the overall global central bank/Fed stance. The Fed is now in “pause” mode still at least May’19 as it is supposed to hike again in June’19. With the surprised February cut, India is probably the 1st major economy in G-20, where the central bank has cut in recent times.
The market is also surprised on the inflation stance of the new RBI governor Das, who is not a trained economist (usually required for the RBI governor post or has similar experience equivalent to a central bank governor), but an obedient bureaucrat. Das basically trashed the high core inflation in India as a statistical aberration and justified the low headline CPI for the rate cut as by RBI act; the MPC is bound to follow the headline CPI and not the core CPI (excluding volatile fuel and food components).
It’s true that as per global standard including Fed, ECB, and BOJ, the inflation targeting is the headline CPI theoretically, but practically all follows the core inflation concept for the volatile fuel and food components. The Fed looks at the US core PCE (core inflation expectations) to stay ahead of the inflation curve.
The dual mandate of the Fed is maximum employment with price stability (+2% sustainable inflation). But in India, the single mandate of the RBI is only inflation targeting (with a vague reference to GDP growth) and that’s too in very ambiguous term at +4% with a maximum permissible limit of fluctuations at +/- 2%; i.e. it’s a wide range of +2% (rate cut) to +6% (rate hike) with the mid-point +4% (neutral). As there is no official reliable regular data on unemployment, wage growth in India (unlike in the US), RBI only follows inflation and GDP growth rate.
The vital question is now whether a central bank will follow the headline CPI or the core CPI? The answer is core CPI without any doubt and the RBI should also follow that consistently despite there may be serious doubt about the quality or credibility of these economic data in India.
As per the government data (official), the Indian GDP is growing around +7.5%, whereas the headline CPI is now around +2.26% for December and November (almost at the US levels after “Patelexit”) and the core inflation is around +5.90%. There are serious flaws in the data as an economy can’t grow above +7% consistently with the headline inflation is just around +2%.
Thus, either the GDP or the headline CPI data is flawed. The sticky core inflation rate of around +6% is consistent with the GDP growth of above +7%. As per an unofficial data, the Indian unemployment is now around 7%, which the government vehemently denied ahead of the election and report, was not officially published, resulting in a surprise resignation of a senior statistician.
On early Monday, Nifty Fut is currently trading around 10884.00, slumped by almost -0.67% on the lingering concern about RBI credibility. Nifty Fut is well-off the RBI day high of 11142.35 (5-month high) despite an unexpected rate cut by the RBI as it was not backed by prudence, but political considerations with a 4-2 vote. The deputy RBI governor Acharya may also soon put his paper in protest of political pressure by the government ahead of the election and for the sake of fiscal deficit management by eyeing RBI surplus.
Technical View (Nifty, Bank Nifty, USDINR)
Technically, whatever may be the narrative Nifty Fut-I (NF) has to sustain over 10975 for a further rally to 11025*/11075-11125/11155* and 11205/11245*-11315/11405 in the near term (under bullish case scenario).
On the flip side, sustaining below 10955, NF may fall to 10890*/10820-10770/10720 and 10660/10580*-10520/10435 and further 10375/10285-10180/10000 in the near term (under bear case scenario).
Technically, Bank Nifty Fut-I (BNF) has to sustain over 27650 for a further rally to 27825/27925*-28115/28275 and 28400/28465*-28655/28800 and further 28950/29100 in the near term (under bullish case scenario).
On the flip side, sustaining below 27600-27500, BNF may further fall to 27300/27150*-27000/26875 and 26750/26500-26350/26200 and further 26000/25700 in the near term (under bear case scenario).
Technically, USDINR (spot) has to sustain over 72.05 for a further rally to 72.75*/73.35-73.75*/74.15 and 74.50*/74.75-75.45/76.05 in the near term (under bullish case scenario).
On the flip side, sustaining below 71.90, USDINR may further fall to 71.25*/71.00-70.50*/69.90 and 69.00*/68.50-67.90/67.15 in the near term (under bear case scenario).
India 50
Pivot: 10975 Support: 10890 10820 10770Resistance: 11025 11075 11125 Scenario 1: STRONG ABOVE 10975 AND SUSTAINING ABOVE 11025*/11075-11125/11155*, NIFTY FUT MAY FURTHER SURGE TO 11205/11245*-11315/11405 IN THE NEAR TERM Scenario 2: WEAK BELOW 10955 AND SUSTAINING BELOW 10890/10820*-10770/10720, NIFTY FUT MAY FURTHER PLUNGE TO 10660/10580*-10520/10435 AND FURTHER 10375/10285-10180/10000 IN THE NEAR TERM Comment: SHORT TERM RANGE: 10635-11155
Pivot: 70.8 Support: 69.9 69 68.5 Resistance: 71.3 71.9 72.75 Scenario 1: STRONG ABOVE 70.80 AND SUSTAINING ABOVE 71.30/71.45-71.90/72.05*, USDINR MAY FURTHER SURGE TO 72.75*/73.35-73.75*/74.15 AND FURTHER 74.50/74.75-75.45/76.05 IN THE NEAR TERM Scenario 2: WEAK BELOW 70.50 AND SUSTAINING BELOW 69.90/69.00-68.50/67.90, USDINR MAY FURTHER FALL TO 67.15/66.80-66.50/65.80 IN THE NEAR TERM Comment: SHORT TERM RANGE: 69.00-72.75