*Market Wrap: 06/12/2016 (17:30)*
*Technically Nifty Fut (Dec) now (LTP: 8164) has to sustain over
8195-8225 area for further rally towards 8275-8330 & 8395-8430 Zone.*
*On the other side, sustaining below 8155-8125 zone, NF may further fall
towards 8085-8040 & 7980-7890 area in the near term.*
Nifty Fut (Dec) today closed around 8164, almost flat after making a mid
day high of around 8209 and closing session low of 8157. The opening
minutes high of 8219 may be an act of “fat finger”.
Indian market today opened also almost flat following neutral global
cues; but hopes of RBI rate cuts and other liquidity adjustment
probability (CRR) has caused some rally, especially in the PSBS and some
selective private banks (combination of short covering and some value
buying ?). Again, towards closing session, market might take some
caution as in reality, RBI may stand pat tomorrow or even if it cut
0.25%, that may have been already discounted by the market.
Market is expecting that RBI may cut 0.25-0.50% along with reduction in
the CRR to normal level for the excess demonetization banking liquidity.
Although, it’s very rare for the RBI to cut policy rates in two
consecutive meetings in a normal circumstances, the present situation of
the economy after the demonetization led crisis is not normal at all and
considering the downside risks of near term growth (GDP) and lower core
inflation trajectory, market is assuming that RBI may cut by 0.25-0.50%
tomorrow.
But, it may not be a simple inflation vs growth play for the RBI this
time; it may look another angle for USDINR equation. Any abrupt cut in
repo rate with a more dovish tone accompanied with normal CRR may make
the G-SEC bond yields lower, thus paving the exit route of FPI(s) easier
and INR may also fall due to US-IND bond yield & interest rate
differentials. Moreover, a weak INR may also accelerate EQ & Bond
markets selling by the FPI(s).
Another point is that, even if RBI cut tomorrow, it may only help banks
temporarily for the NIM as they have already transmitted/lowered their
MCLR after demonetization surge in banking liquidity. Banks will not
probably transmit any additional cut by the RBI at this point of time as
there is no great demand for credits as well.
After demonetization led economic disruptions, Indian consumption story
is already very tepid as of now and going forward, Govt’s stance of “war
on black money” may be another reason for long term slack on the
economy. As there is no significant consumer demand, mere lowering of
lending rate may not translate any vicious cycle of investment &
spending and kick start of the economy, at least in the near term.
Also, if RBI chooses to reduce the CRR for the excess banking deposits,
then it may be even more negative for the banks as well as the
economy/market. In that scenario, Banks has to park at least 21% of SLR
requirements by investing into G-SECS Bonds, which may also cause
massive fall in bond yields, paving the way for INR depreciation and FPI
(s) outflow, beside probable capital loss of banks for their bond
portfolios. But a normal CRR for the excess demonetization may help the
banks for the lost interest which is already being paid by them to the
depositors.
Thus, irrespective of RBI cut or no cut tomorrow, market may fall as it
has been already rallied for the rate cut hopes and even if there will
be 0.25-0.50% rate cuts, market may give a whipsaw rally, but
ultimately, those incremental rate cuts may not be transmitted at all by
the banks and there will be no utility as well for the economy.
Moreover, fall of Indian bond yields as a result of any drastic RBI rate
cuts may also make INR weaker, which is also not good for the Indian
economy as it is largely import oriented. Banks can’t transmit any
further incremental RBI cuts, if the small savings rates in India are
not lowered drastically, which is also a very tough political decision.
Market may be relieved to some extent as almost 85% of the so called
HDCN has entered into the banking system and by Dec end, more than 100%
may be deposited with the banks (including unaccounted money and
counterfeit notes of HDCN?)!!.
Thus, market may be assuming that there is no great loss of “wealth” and
eventually it will return to the formal/informal economy, even after
paying the required 50% tax. But, after the winter session of the
Parliament ends, Govt may also announce some more restrictions for
withdrawals in the suspicious bank accounts deposits to extend the
present “war on black money” to a logical end along with other measures
like “surgical strike” on gold, real estates and other financial assets.
As most of the old HDCN are being deposited with the banks courtesy
various loopholes & exemptions and VDS contrary to the earlier
perception of “wind fall gain”, Govt may find it tough to justify the
“gain” against the “pain” of the public for this whole idea of the
demonetization to face the coming state elections.
Thus overall collateral damage for the economy may be more than the
expected benefit for this demonetization & “surgical strike on the black
money”. The root cause of the “black/unaccounted money” should have been
put under “surgery” first rather than the “symptoms/organs”.
Govt perhaps need to do first the job of tax reforms with reasonable
rates, fewer exemptions and less Governance to wipe out the basic causes
of graft & black money creations. Even, the process of exchanging old
HDCN from the banks are inviting massive corruptions and more over
various rules & regulations in the IT Dept are also increasing their
discretionary power, paving the way for more future corruptions (more
governance, more corruptions).
Globally, all eyes will be on the ECB (8^th Dec), OPEC meets tomorrow
and developments in Italy.
Yesterday’s record high OPEC production figure may be an indication that
in reality supply gluts in oil may remain in 2017 too, despite some
production cut agreements. Moreover, making agreement is one thing and
implementation of the same is another thing, keeping in mind past
fragile records of the OPEC members.
In Italy, where banking NPA is now around $352 bln, the most fragile
bank (Monte Parche) may face some tough times in the weekend, if a $5
bln bailout package is not worked out in the next few days. Thus, Italy
may be falling fast into a full blown serious political as well as
banking crisis in the coming days, despite market ignored the referendum
result yesterday.
The impending political & banking crisis may also force ECB/Draghi to
continue its dovish monetary policy in the foreseeable future as Govt
may be also scared for a fiscal/structural stimulus like “Trumponomics”.
On the other hand, Fed is prepared to hike in Dec’16 and most probably
will also hike at least twice in 2017. Thus, the divergent monetary
policy between Fed & ECB may make USD more stronger across the board
(DXY) and in that scenario, USDINR may gain more strength in the coming
days,, if RBI choose an extremely dovish path. A strong USD may ensure
more FPI(s) outflows and subsequent selling in Indian EQ & Bond markets,
beside collateral damage to the economy.
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Thanks & Regards,
Asis Ghosh
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