*Market Wrap: 05/01/2017 (17:30)*
*Looking at the chart, Nifty Fut (Jan @8287) has to sustain over
8310-8335 area for further rally towards 8375-8410 & 8485-8545 zone in
the short term (under bullish case scenario).*
*On the other side, sustaining below 8270-8240 zone, NF may further fall
towards 8180-8140 & 8100-8040 area in the near term (under bear case
scenario).*
Nifty Fut (Jan) today closed around 8287 (+83 points) after making a
late day high of 8299 and opening session low of 8236.
Indian market today opened in a positive note after some fall in USD/US
bond yields following overnight FOMC minutes (Dec), which reveals “less
hawkish” stance by different members of Fed and concern of a stronger
USD & rapid borrowing costs for the US economy.
In brief, Fed will be both economic data & “Trump” dependent in its
approach to handle the US rate hiking cycle in 2017 and depending upon
the actual strength of US economy (employment, GDP growth, inflation
trajectory etc) and fiscal plan & implementation of Trump, Fed may
“gradually” hike rates in 2017 by either thrice or twice.
As a result, both US bond yields & USD dropped across the board. USDCNY
also crashed considerably to 6.78 from the recent high of 6.98 (-1.4%)
after some PBOC steps of capital control (outflow) and demands of Yuan
ahead of forthcoming lunar holiday season in China.
Along with the weak USD, domestic market sentiment may be also boosted
today by FM’s comments that actual FY-17 tax revenue collection may
exceed the budget estimates and as such, market is assuming that Govt
will be able to keep the projected fiscal deficit at 3.5% of the GDP for
the FY-17; adherence of the fiscal discipline in the last year’s budget
was one of the reason for huge post-budget rally.
Apart from adherence of fiscal discipline even after incremental capex &
other social expenditure by the Govt, market may be also looking for
some kind of “windfall gain” from the demonetization exercise.
Originally, Govt was expecting somewhat around 5 lakh cr of such
“windfall gain” or “special dividend” from the RBI, out of extinguished
old currency notes (SBCN not returned to the banking system).
But, eventually now after nearly all (97%) the SBCN(s) has returned to
the banks, some analysts are projecting around 50000 cr (against
previous estimates of 1 lakh cr) as “special dividend” from the RBI and
another 1 lakh cr (approx) from IDS-II (demonetization led IT
disclosure). Thus, Govt may now get “windfall gain” of around 1.5 lakh
cr from the demonetization, which may be used as “stimulus/helicopter
money” in the forthcoming FY-18 budget.
Although, RBI is again calculating (reconciling) all the returned
SBCN(s) to “double check” any “wrong entry” and eventually may announce
slightly different figure; it has repeatedly denied any possibility of
any “special dividend” out of demonetization till now as it will neither
reduce their balance sheet liabilities or affect any P/L account.
But, after Govt’s ordinance related to SBCN, even if liability side is
extinguished to the proportion of old notes not returned to the banks,
still it will not affect the RBI P/L account and as such for any “forced
special dividend”, RBI has to liquidate some of its assets like GSECS or
FX reserve in the market, which may also be next to impossible & absurd.
RBI earned by repo & reverse repo differential to banks and buying &
selling difference in GSECS & FX/USD and out of that profit, transfers
certain amount to the Govt as “regular dividend”. RBI may eventually,
transfer more such “regular dividend” to the Govt in lieu of a onetime
“special dividend” as Govt also need funds (revenues) for PSBS
recapitalization & other capex/social expenditure desperately.
For IDS-II assumption of Rs.1 lakh cr, it may take significant time and
effort on the part of the Govt/IT to shell out such amount from the IT
seizers as various administrative & legal hurdles will also be there.
Market may be taking some solaces that as almost all the SBCN(s) has
returned to the banking system, it will be eventually not destroyed and
there will be gradual redistribution or rebuilding of “wealth” and
Indian consumption may also be gradually restored in the coming days.
But, as Govt has already said that by simple depositing “black money”
into one’s accounts or other’s accounts, it will be not automatically
“white” and for that one needs to pay the required income tax on it. As
par some report, more than 50% of the demonetized deposits for around
Rs.7 lakh cr is suspected to be “black/unaccounted money” in nearly 64
laks bank accounts (??).
Considering the current manpower of the IT and its technological
innovations, it may take at least five more years to yield some taxes
out of such huge suspected demonetized bank deposits. Thus, Govt may put
some withdrawal restrictions from the bank accounts, suspected for money
laundering or even consider some types of BTT in the forthcoming budget.
Eventually, redistribution or rebuilding of “wealth/black money” may
take several years and until then, Indian consumption & consumer
confidence may remain very tepid.
Now, after 2 months, acute cash crunch may be receding in metro areas
and gradually, cash flow to the rural & semi-urban areas should improve,
but it may take more time for the revival of stability in the supply
chain and till that, PMI may also be in the contraction zone as of now.
The real pain or gain of demonetization may be felt only after 3-6
months after initial disruptions.
<https://3.bp.blogspot.com/-KZUxoqzFLZE/WG5ftZCnunI/AAAAAAAAKEA/vRBlNM-1MpMuPKzmbKUDbeUG3bubkkbSACLcB/s1600/SGX-NF-PATTERN-05-01-2017.png>
SGX-NF
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Thanks & Regards,
Asis Ghosh
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