*Market Wrap: 07/12/2016 (17:30)*
*Indian economy may be now in an uncharted territory amid uncertain
prospects due to demonetization & political disruptions and lots of
global headwinds; market may not like such uncertainty for long
irrespective of any RBI rate action or any liquidity management measures.*
*Technically Nifty Fut (Dec) now (LTP: 8137) has to sustain over
8165-8225 area for further rally towards 8275-8330 & 8395-8430 Zone.*
*On the other side, sustaining below 8135-8085 zone, NF may further fall
towards 8040-8000 & 7940-7900 and 7840-7675 area in the near term.*
Nifty Fut (Dec) today closed around 8137 (-32 points) after RBI
“surprised” the market with no repo rate cut of even 0.25% as highly
expected by the street. Moreover, overall statement of the RBI regarding
inflation trajectory was quite hawkish contrary to the earlier
perception of most of the market analysts.
As expected, RBI slashed the FY17 GVA projection by 0.5% to 7.1% from
the earlier estimate of 7.6%. As par the RBI statement, the MPC did not
find any ground for an immediate rate cut amid hawkish Fed stance (US
rate hike), uncertain domestic economy & inflation trajectory as a
result of demonetization, upside risks of Oil and incomplete
transmissions of previous 1.75% rate cuts by the RBI from Jan’15 (only
around 1% may have been transmitted by the banks so far).
But, RBI’s subsequent comments and some accommodative consolation that,
“if situation gives any space, then it will surely consider rate cuts in
the near future” and the stance that the 100% CRR on excess
demonetization bank deposits will be back to normal (4%) from 10^th Dec,
has limited the market fall by some extent towards the closing session.
RBI will use the MSS & other liquidity adjustment measures to take care
of the excess banking liquidity (as expected).
As par RBI, so far people deposited around Rs.11.55 lakh cr worth of
“demonetized” notes; although some source based news may be indicating a
figure of almost Rs.13.50 lakh cr till last Monday. Incidentally, RBI
highlighted the issue of “perfect counterfeit currency notes of old 500
& 1000 denominations” as the actual cause of sudden demonetization
instead of the Govt’s firm stance for the “black money” issues.
RBI also dismissed the speculation of any “windfall gain” for
itself/Govt and denied any so called “balance sheet” effect for the
“cancelled” demonetized notes, which may not return in to the banking
system and there is no question of transferring any excess surplus out
of this.
Thus, the highly speculative “windfall gain” of around Rs.4.5 lakh cr by
the Govt and the subsequent use of it as “fiscal stimulus” concept
gathered dust and the whole concept of finding “black money” and use it
for the economic development of the country may be in jeopardy also.
Incidentally, the overall cost for the demonetization on the economy may
be around Rs.1.50 lakh cr and an an amount of around Rs.1.55 lakh cr may
not be returned to the banking system as par some reports. Thus the
Indian economy may have suffered irreparable collateral damage for this
demonetization without any significant "gain".
After two years of successive droughts, when the Indian economy seems to
be on a recovery path, especially for the rural landscape, the sudden
decision of demonetization without proper preparations & digital infra
in place has resulted in a severe all round economic slowdown and may
affect the GDP by around 0.40% on an average per month, till full
remonetization (at least 3-6 months more). The Govt's stance of "war on
black money" may also destroy the story of Indian consumption by at
least 30% even for the long term (as par various retail surveys).
Nifty gyrated by a wild swing of more than 100 points within few minutes
after the RBI announcement and made a session low of 8095 with a day
high of 8219 in the post lunch session.
As expected, after the RBI announcement, INR got more strength & G-SECS
Bonds tumbled (yields gone higher).
But, Indian bond yields may affect in the coming days, when some of the
excess liquidity will come in the banking system after 10^th Dec.
Although, the excess demonetized liquidity will be absorbed by the
MSS/LAF mechanism by a significant portion, it’s almost sure that a
large part of it may also enter into the banking system.
Although, apparently for the short term, the RBI CRR reduction action
seems to be positive for the banks for liquidity purpose & lending and
they can also earn some interests by way of reverse repo, while they are
earning nothing now, it may have also huge negative implications for
them in the long term.
There is no incremental demand for loans at this point of time either
from the corporates/business/MSME or also from the retail segments and
banks have already enough liquidity for the existing credit demands from
the economy. These excess demonetized funds have to be parked in G-SECS
by at least 21% on a daily basis as par SLR requirements by the banks.
Already there is scarcity in the market for these G-SEC Govt bonds and
more buying from the banks will cause another leg of bond rally,
resulting in free fall of Indian bond yields. This may also make more
FPI(s) outflow (exits) as in US and also in other advanced G-10
economies, bond yields are surging now. Thus, consequently INR will be
weaker, which is again not good for the Indian economy and the market.
This excess demonetization bank deposits will eventually withdrawn once
the full remonetization is done with easing of various restrictions,
which may cause next wave of G-SECS bond selling by the banks, resulting
in a huge capital loss in the future (for the bond portfolio), although
in the short term it will gain from some interests earned from the
reverse repo window.
Govt can’t issue MSS bonds or other LAF measures indefinitely as it’s a
temporary measure and also Govt has to pay some interest on it without
using the same for any fiscal deficit funding purpose (like infra
spending etc). In that scenario, fiscal math equation may be also in
pressure along with the expected downfall in overall revenues (direct &
indirect taxes) because of this demonetization fiasco and Govt may not
be in position for an incremental capex, which is now need of the hour
amid tepid private investments and pain of twin balance sheets.
As par some reports, NAMO has reportedly admitted to the CM of TL in a
recent meeting that he has blundered for this demonetization strategy
without much deeper thought & consequences, despite his public stance
that this a “right move” to eradicate corruptions and the “black money”
from India.
This report may or may not be true, but expect more political chaos in
the coming days and the current winter session of the Parliament may
turned to be a complete wash out. In that scenario, consensus on GST
“Dual Control” may be very tough to be achieved in the forthcoming GST
council meetings scheduled on 10-11^th Dec and subsequently it may not
be possible to pass the final GST bill in this Parliament session and
planned April’17 roll out of the same may also be in jeopardy.
Govt/FM may “officially” announce shortly another tentative timeline of
Se’17 for implementation of the GST, citing “constitutional compulsion”
for the time being. But again, considering various political compulsions
and series of state elections in 2017-18 & general election in early
2019, it may be even tougher for the Govt to implement the GST before
2019 general election. Market (FII) may not be amused for so much
uncertainty out of demonetization led economic disruptions and GST roll out.
Thus the sudden decision of demonetization might be proved as a
“political suicide” for the NAMO/BJP instead of a “master stroke” in the
days ahead. Political risks of India may be significant in the coming
days, especially amid severe under-employment or unemployment in the
country along with the present demonetization pains for the public at
large. The “short term” pain may be converted into “long term” pain
without much “gain”.
Globally, EU market was in positive today after market buzz of Italian
Govt bail out for the Monte Paschi bank.
Japan (Nikkei) was also strong after some drops in Yen and a tweet by
Trump, announcing $50 bln investments & 50000 new jobs in US by a
Japanese VC firm (Softbank).
Yesterday’s wild volatility in the Boeing share after Trump’s tweet
about cost of the new Air Force-one plane for him may be an indication
that going forward, this “Twitter Tantrum” by Trump may be a source of
significant volatility in the financial market.
All eyes will be on the ECB meet & Draghi presser tomorrow evening for
an idea about extension of the current bond buying programme till
March’17 or March’18 (at a slower rate due to scarcity of the eligible
bonds in the market) and any tapering plan for the future. Considering
the impending EU political & banking risks, Draghi may play dovish this
time and the current divergent monetary policy between ECB & Fed and
other G-10 economies may make USD (DXY) stronger in the coming days.
Although, RBI has taken a “hold” stance for the time being, thanks to
the “owlish” & “inflation warrior” Patel/MPC, it has to be in
“accommodative” mode due to domestic audience pressure and to keep its
“political bosses” in good humour, irrespective ofany rate cut utilities.
Thus, RBI has to cut by 0.25-0.50% around Feb-March’17 after seeing the
actual inflation trajectory, overall scale of economic disruptions for
the demonetization and further Fed guidance on future rate hikes in 2017.
Fed may clear its stance by around Feb-March’17, after Trump take charge
of the Oval office in Jan’17 and subsequent actual plan for the proposed
fiscal spending. In the ideal scenario of “Trumponomics”, Fed is
expected to hike at least twice in 2017.
Thus the divergent policy between Fed & RBI may cause stronger USDINR
towards 70-71 level by FY: 17-18, which may not be good for the overall
Indian economy & the market.
Another point is that, domestic market is not showing any fresh panic
for the demonetization led “temporary” economic disruptions on the
perception that almost all the so called “black money” is being
deposited in the banking system, it will be eventually exchanged for
“white money” and will be withdrawn or utilized for future consumption.
But, the present stance of the Govt that simple bank deposit and
withdrawal is not enough for the “black money” to be turned into “white”
and one has to pay the required tax for it (at least 50% or 85%) as par
VDS mode (voluntary or non-voluntary) and discretion of the IT AO.
Most of the people are depositing their earlier undisclosed income in
the banks on the perception that it will be taxed as 30%, if they show
it as current year’s income. But, the law is not so simple, considering
from previous similar case laws out of demonetization in 1946 & 1978.
Thus one can expect more legal hurdles, more “surgical strikes on the
black money”, chaos and consequent economic disruptions for not only the
demonetization, but also for the Govt’s stance of “war on black money”,
which has to be logically ended to its conclusion keeping in mind the
“political compulsion” for the next series of state elections & 2019
general election, where “war against corruption for the benefit of the
poor”, “digital India”, “cashless society and digital economy” might be
the main theme along with “surgical strike at LOC”.
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SGX-NF
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Thanks & Regards,
Asis Ghosh
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