*Market Wrap: 29/12/2016 (17:30)*
*Nifty Finished The Dec Exp Almost 1.7% Higher After Bouts Of
Demonetization, Fed & RBI Induced Volatility.*
*What’s Next For Jan-1^st half?*
*Technically Nifty Fut (Jan @8120) has to sustain over 8155-8200 area
for further rally towards 8260-8335 & 8455-8505 zone.*
*On the other side, sustaining below 8115-8070 zone, NF may further fall
towards 8000-7940 & 7890-7790 area.*
Nifty Fut (Jan) today closed around 8120 (+64 points) after making a
late day session high of 8124 and an opening minutes low of 8049 amid
tepid global cues; but supported by some fall in USD & Oil and FNO Exp
day related short covering.
Indian market sentiment today may be also supported in the last hour by
FM’s comments and report card about demonetization, which describes it
“successful” and remonetization is taking place rapidly with more 500
notes are coming into the banking system.
Although, the report card mentioned that GDP may be lower for 1-2 QTR,
it’s transitory in nature. FM also emphasized on some high frequency
data like surge in direct taxes (+13.6% net till 19^th Dec, considering
refunds), indirect taxes (+26.2% till 30^th Nov), Rabi sowing (+6.3%),
LI premiums, MF SIP, petrol & diesel consumption and international
tourism and rubbished the “economic disruption stories” & public “pain”
after demonetization by the media & the opposition political parties. FM
also noted that after demonetization led increase in CASA, public
lending ability of the banks has increased also significantly. So, in
short, we should not be worried about so called “economic slowdown” for
the demonetization.
But, market will only belief such proposition after flash of actual data
released in Jan, 1^st Week, specially auto sales & PMI data for Dec’16.
As par some reports, after surprised surge in Nov auto sales for some of
the companies, Dec figure may be very tepid, especially for the rural
region as acute cash crunch is still continuing.
The surge in direct & indirect taxes figures as mentioned in the
demonetization report card may be for the period prior to Nov’16 (Q2FY16).
Also, the Nov-Dec surge in LI premiums, MF SIP and higher consumption of
Petrol & diesel may be largely related to permission to use of old 500 &
1000 notes (exempted category). This may be also one of the reasons for
surge in direct & indirect taxes (specially, payment of property taxes &
indirect taxes by old notes/unorganized sector). International tourism
may also be a seasonal factor and largely digital payment in nature.
There was another report that, Govt may gain around Rs.1 lakh cr of
“windfall gain” after demonetization by IDS-II as declaration of
previously “unaccounted income/black money” has surged. Also, there is
huge amount, now coming out after numerous IT/ED led AML operations.
But going forward, actual IDS & tax amount may be subjective to various
legal hurdles and also time consuming. There may be significant
administrative delays because, IT dept is itself short of staff to
process such huge data after demonetization.
Also, Govt may be still hopeful for a “special” RBI dividend after
demonetization led “windfall gain”, equivalent to unreturned old notes
to the banks for another Rs.1 lakh cr (??). Although, as par the last
figure few days ago, almost 90% of the demonetized notes may have
already entered the banking system, hopes for a huge “gain” is almost nil.
But, even if some demonetized notes will not return to the banks, it may
extinguish some liability of the RBI, at least theoretically. But, in
practical, this will not affect the P/L of the RBI balance sheet and on
the asset side, there may be Govt bonds (GSECS) & FX assets (mainly USD
TSY). RBI earns profits by buying & selling differences of GSECS & USD
and out of that profit, give dividends to the Govt. If Govt forced RBI
to give the demonetized “wind fall gain” , then RBI may have to sell
GSECS & USD/TSY, which may be also next to impossible for a central
bank, considering various adverse macroeconomic effects. Thus, RBI Gov
has denied for such probability so far.
So, any significant “windfall gain” out of demonetization and use it for
some social stimulus, recapitalization of the PSBS may be also in doubt.
There are also some reports that as a result of demonetized “wind fall
gain” of Rs.2 lakh cr (IDS-II + RBI special dividend to the Govt), FY-18
budget deficit may come around 3-3.5%, just at par with FY-17 and at the
same time, Govt can do its normal capex (infra & rural spending), even
after making provisions for the “helicopter money, tax rate/slabs
reduction, PSBS recapitalization etc.
Thus, a great part of the “dream budget” for FY-18 may be dependent upon
the “wind fall gain” after demonetization and till the actual visibility
of that “gain” in the coming days; market/investors may be in some “pain”.
All eyes will be on the scheduled 31^st Dec’16 address by NAMO to the
nation for any further “shock/surprise”. PM is expected to announce
various remonetization measures, success of demonetization & public
support for it, some restrictions on gold investments, application of
Benami properties act and further steps for the “war on black money”,
eyeing for the forthcoming state elections & 2019 general election.
But, as par some unconfirmed reports, NAMO may also announce
demonetization of the new 2000 note and simultaneous introduction of a
fresh 1000 note for “public convenience” in an another “master stroke”
against “black money holder”, as this time deposit/exchange above 50k
may not be allowed at all without any other exemptions. If this “story”
turns true, then it may be a great “New Year shock” and may bring more
chaos, just ahead of another pay day (ATMS are still running short of
cash and banks are still rationing cash withdrawals).
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SGX-NF
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Thanks & Regards,
Asis Ghosh
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