Market Wrap: 04/10/2017 (17:00)

NSE-NF (Oct):9945 (+76; +0.77%)

(TTM PE: 25.82; Abv 2-SD of 25; TTM Q1FY18 EPS: 384; NS: 9915; Avg PE: 20; Proj FY-18 EPS: 418; Proj Fair Value: 8360)

NSE-BNF (Sep):24160 (+48; +0.20%)

(TTM PE: 27.18; Abv 2-SD of 25; TTM Q1FY18 EPS: 887; BNS: 24113; Avg PE: 20; Proj FY-18 EPS: 961; Proj Fair Value: 19220)

For 05/10/2017:

Key support for NF: 9945-9905

Key resistance for NF: 9975-10015

Key support for BNF: 24050-23900

Key resistance for BNF: 24300-24600

Hints for positional trading:

Technicals indicate that, NF has to sustain over 10015 area for further rally towards 10050-10115 & 10160-10205 area in the short term (under bullish case scenario).

On the flip side, sustaining below 9995 area, NF may fall towards 9945-9905 & 9860-9810 area in the short term (under bear case scenario).

Similarly, BNF has to sustain over 24300 area for further rally towards 24600-24750 & 24850-25050 area in the near term (under bullish case scenario).

On the flip side, sustaining below 24250 area, BNF may fall towards 24050/23900-23800 & 23700-23600 area in the near term (under bear case scenario).

Indian market (Nifty Fut/India-50) today closed around 9945, galloped by another 76 points (+0.78%) after making an opening minute’s low of 9860 and closing session high of 9954 following RBI’s neutral stand on its policy rate as highly expected. It’s basically a “hawkish hold” by RBI today as the Dy Gov clearly stated that considering the global factors (Fed), higher oil and subsequent higher trajectory of Indian inflation, there is very little scope for monetary policy adjustments in the coming months (Dec’17).

Thus, any policy rate cut by RBI in Dec may be also looked remote as of now; RBI has also termed the present slump in GDP as transitory, being an implementation disruption of GST. RBI today basically lowered the GDP/GVA projection for FY: 18-19, but upped the same for FY: 20, and also projected higher trajectory for inflation. In short, RBI is hawkish on inflation & dovish on growth and sees little room for any policy cut in the coming months; thus it may be termed as “hawkish hold”.

Both INR & Indian GSEC bonds slump today after RBI policy meet announcements to hold rate as some market participants were also expecting at least 0.25% rate cut today after Govt cut excise duty on gasoline by 2/- per lt as a signal for RBI for Govt’s effort to lower inflation.

But, market, especially PSBS rallied after the RBI policy today on talks of recap & the 0.5% SLR cut to 19.5% (in phases). This SLR cut may benefit the PSBS as their BS is theoretically starved of liquidity due to the NPA fiasco, while BS of private banks are much stronger; SBI/BOB/PNB may be exceptions cases within the stressed PSBS space.

Again, such recap talks of PSBS are nothing new and thus going ahead market may focus on actual resolution of stressed assets & credit growth, paving the way for resumption of private capex.

Frankly speaking, BS of PSBS may be stressed, but not so much stressed that they are not able to extend corporate credit. In fact, there is ample liquidity in the system/PSBS for providing quality loan, but there is distinct lack of quality borrowers & eligible/viable projects to which such quality loan could be extended amid present scenario of stressed assets & corporates.

RBI Gov has also expressed some concern over India’s fiscal discipline vs fresh fiscal stimulus debate by pointing that combined state & central Govt fiscal deficits already running around 6% and coupled with that widespread farm loan waivers in various states may have serious implications for overall fiscal discipline & Govt capex. As par some reports, around Rs,2 tln may cost the exchequer for these farm loan waivers for this political populism.

Overall, RBI may be very concerned about rate cut transmission mechanism by the banks and thus it’s also suggesting for an external benchmark for pricing of loans by the banks rather than the present method of MCLR/base rates (internal benchmark) for greater transparency. This may be negative for the banks, if implemented.

RBI is also extremely concerned about the huge stressed corporate assets and thus emphasized its proper resolution for the overall health of the banks & economy. RBI also wants a reinvigoration of investment activity, which in turn may revive the demand for bank credit by the corporates. RBI is also suggesting speedy recap of PSBS to cope with any sudden revival of credit demand by the industry.

RBI is also suggesting for elimination of infra gap, restarting of stalled investment projects especially in the public sector domains; enhancing the ease of doing business such as simplification of GST; faster roll out of affordable housing projects with time bound single-window clearances & rationalization of excessive high stamp duty by the states; i.e. RBI may be suggesting the Govt to bring housing completely under GST.

Today’s RBI action on the SLR & HTM front may be beneficial for the banks for their liquidity aspect & ability to provide more loans, it also reduces the demand for Govt securities, which may be not supportive for the Govt’s plan of additional fiscal stimulus; RBI may be not comfortable with a huge additional fiscal stimulus package by the Govt to stimulate growth as it may seriously jeopardize the fiscal discipline.

In short, today’s RBI policy & various statements may be indicating that it does not believe rate cut/monetary stimulus as the only remedy to revive growth and for that, some structural reform is necessary along with proper transmission of rates & resumption of private investment cycle.

Today Nifty was supported by RIL, ITC, Tata Motors, Kotak Bank, Bharti Infratel, Sun Pharma, HPCL, M&M, Yes Bank & IOC by cumulative around 51 points, while it was dragged by HDFC Bank, ICICI Bank, Bharti Airtel, Infy, Eicher Motors, Axis Bank, Maruti, UPL, TCS & Bajaj Fin by combined 18 points. Overall, barring metals & IT, all the sectoral indices closed in green today with energy/OMC, pharma & FMCG leading the gain.

Summary of today’s RBI meet:

· RBI keeps Reverse REPO rate unchanged at 5.75% & Bk Rate & MSF Rate Unchanged At 6.25%

· SLR Cut By 50 bps To 19.5% Fm Oct 14 Fortnight. Held-to-maturity/HTM Limit To Be Cut To 19.5% By March 31, 2018

· MPC voted 5-1 in favour of status quo on repo rate; MPC Dholakia sought at least 25 bps cut in Repo rate; MPC committed to keep CPI inflation close to 4% on durable basis

· MPC says imperative to reinvigorate investment activity; GST-related teething problems may get resolved soon; core CPI inflation so far somewhat higher than expected; expect growth to accelerate in Oct-March

· Working toward resolution of banks' stressed corp exposure; recent reforms to improve transparency, formalization of economy; input cost rise, low pricing power may hit cos' margins; higher invest would revive demand for bank credit

· State farm loan waivers may result in fiscal slippages; state farm loan waivers may undermine quality of public spend

· Household #consumption demand may get upward boost from housing allowance-Gov

· Expects #CPI to rise from current level; noted possibilities of fiscal slippages

· If fiscal gap widens 50 bps in FY18, then CPI may rise 25 bps Vs view

· Recent reforms to boost growth over medium to long term

· Real GVA growth seen at 6.4% for July-September, 7.1% for October-December

· Real GVA growth seen at 7.7% for January-March; 7.4% for FY19

· Projection of real GVA growth for FY18 revised downwards to 6.75% from 7.3%

· Recapitalizing PSU banks to ensure growth impulse is not restrained

· RBI reiterates need to recapitalize public sector banks

· States' farm loan waivers may result in fiscal slippages

· Committed to keep inflation near 4% on durable basis

· PI inflation for Jan-March, Apr-Jun 2018 quarters seen at 4.6%

· Inflation expected to rise to levels of 4.2-4.6% in H2FY18. On positive side, core Ind posted a robust growth in August

· We express concern on weakening of the manufacturing sector in the first half of the year: RBI Gov

· Recapitalizing PSU Banks will aid growth.

· Continue work towards resolution of stressed assets in banking sector

· Services sector showing a healthy growth rate; Cyclical upturn in growth could be seen in next 2 QTRS: RBI Gov

· Panel moots switching to external benchmark for loan pricing; economic activity expected to recover led by services

· Teething problems linked to GST could be resolved soon: RBI Gov

· Measures need to be undertaken to support growth achieve faster closure of output gap incl. restarting stalled investment projects: RBI

· Enhancing ease of doing business, including by further simplification of GST; & ensuring faster rollout of affordable housing program: RBI

· There are factors that have affected growth in the second quarter, some of them will dissipate: Gov

· Three external benchmarks will be proposed by the interest rate review committee: DY Gov

· Implementation Of GST Has Stalled Revival Of Growth In Some Ways; Some Weakness Persist In Mfg Sector: Gov

· Imperative To Revive Investments Which In Turn Will Revive Credit Demand: Gov

· Oil Price Risk & Global Volatility Has Risen; Given Inflation Did Not See Much Room For Monetary Policy Adjustment; cos' credit risk profile shows gradual improvement: Dy Gov

· Spoke To Banks On Stickiness Of Base Rate, Some Banks Have Lowered Them: Dy Gov-Viswanathan

· Stock Exchanges To Also Act as Regulators in The Govt Security Market; To Hold State Development Auction Weekly: Dy Gov Kanungo

· Remain committed to improving transmission by banks: Dy Gov

· Next MPC Meeting To Be Held On December 5-6

· High frequency indicators indicate uptick; cyclical upturn likely in the next 2 quarters: Gov

Indian Market Today Opened In Positive On Renewed Hopes Of An “Unexpected” Rate Cut By RBI:

Indian market today opened almost flat, but soon rallied tracking positive global cues and renewed hopes of a RBI rate cut after sudden roll back (cut) of ED by the Govt on petrol/diesel by 2/- just ahead of RBI policy in an effort to signal the central bank that Govt is “proactive” in containing inflation due to recent rise in Crude Oil. This was interpreted as a signal for RBI to consider an urgent rate cut today to stimulate the slowing economy.

Overall, most of the economists recently polled are not expecting any change in policy from RBI this time, which is now on “neutral” mode; but some hopes are there for CRR cut or even a 0.25% “Diwali Gift” (unexpected cut) to the nations to rejuvenate Indian growth story.

Looking at today’s price action so far, it seems that market may be already discounting a “dovish hold” or even a 0.25% cut by RBI; in that sense, if RBI turns out to be on “hawkish hold” side today; market may fall again to some extent.

RBI may term the sudden fall in Q1 GDP as “one off” (transitory) due to adverse effect of GST & DeMo and may wait for another 1-2 QTR for a definitive view & rate action. RBI may also lower the GVA/GDP projection for H2FY18, while keeping the CPI target intact.

But sudden ED cut by the Govt may be also treated as political populism and negative for fiscal deficit concern as around 0.16% of GDP revenue may be affected for such ED cut, while GST revenue may be still subdued. Market is already cautious for muted Q1 earnings, stretched valuations and concern for fiscal slippages amid talks of various fiscal stimulus packages by the Govt to revive the economy out of its deepest slump since 2014.

Also, a mere 2/- or even 5/- tax cut (central ED, state VAT & OMC margin) may not be enough for containing spiraling inflation as 0.25% of CPI may be affected for a 10% movement on retail prices of gasoline; states may be reluctant to offer such cut in VAT irrespective of their political colours as its an easy way of revenue.

Again, if RBI cut 0.25% today, it may not move the needle too much to stimulate the Indian economy as in this era of globalization & competition; Indian repo rate should be around 4.5% at least in comparison to China’s 4.35%.

Although, theoretically RBI can cut by another 1% to bring the repo rate at 5% and RRI/neutral rate at 1.5% assuming average CPI at around 3.5%; but that may be very risky for RBI credibility and the legacy stance of a “hawkish central bank” among the FPIS, who are very fond of India’s traditional high bond yields as a rare combination with s stable economy & democracy. Any drastic change to a dovish central bank can seriously harm the Indian bond market.

Globally, Asia-Pacific markets were mixed today as USD was under some stress on concerns of legislative passage of Trump’s tax reform bill and its ultimate benefit to the US corporates, US middle class & the US economy itself as there is no credible plan to contain the resultant fiscal/revenue deficit because of significant tax cuts coupled with abolition of various tax deductions.

Market may be also worried about Fed chair uncertainty after Yellen’s term expires in Feb’18. As par reports, although Yellen may be a potential “candidate” for her extension, Trump may not oblige and will appoint a fresh Fed chair. Previously, Warsh, a known hawk was speculated to be the next Fed chair and thus USD got some boost yesterday, but now it appears that Trump may also consider other 3 eligible candidates including Cohn & Powell, who may not be so much hawk and all these uncertainties may have been affecting the USD/risk trade now.

Overnight US market closed in another fresh record high, helped by upbeat auto sales data for Sep; although the figure may be distorted by replacement led demands from Harvey & Irma hurricane and some extra discounts. Apart from auto, US market was also supported by airlines (less than expected loss due to Harvey/Irma and optimistic outlook) techs, industrials, defence and gun makers (after horrific Las Vegas mass shooting incident).

DJ-30 closed around 0.37% higher at 22642; S&P-500 added almost 0.20% and closed around 2535 and NQ-100 rose by 0.2%. Overall, strong Mfg PMI data on Monday and tax cut/reform optimism coupled with hopes for blockbuster earnings in Q3/H2 may be driving the US market right now, although the valuations may be quite stretched.

Thus Q3 earnings growth needs to catch up the rally in the US market, which is so far up by more than 13% YTD in S&P-500. Another headwinds for the US stock may be higher interest rates & USD amid fear of Fed’s dual QT (both BS tapering & Fed rate hike in Dec), which may result in US bond yields surge.

US stock future (SPX-500) is now trading around 2531, almost flat (-0.06%); market may now focus on Yellen & Draghi’s speech apart from deluge of US economic data including NFP on Friday. Also NK ICBM activities may be on the watch in the weekend or next few days till 18^th Oct, China’s Party congress. Technically, SPX-500 now need to sustain above 2535 zone for further rally; otherwise expect some corrections.

In the morning today, World Bank raised China GDP for 2017 & 2018 to 6.7% (vs 6.5%) & 6.4% (vs 6.3%), which may have also boosted the Asian/Global market sentiment to some extent.

Elsewhere, Australian Market (ASX-200) closed around 5652, down by almost 0.90%, dragged by banks & financials, basic resources, miners, energies, media, utilities & telecoms. Market sentiment was also affected by a higher AUDUSD today, which is now trading around 0.7854, up by almost 0.23% as yesterday’s RBA statement fine print may be indicating that RBA looks less dovish than its usual talk down effort for a lower AUD.

Also, higher GDP projection of China by World Bank today may be positive for AU economy & AUD, China being the biggest trading partner of AU.

Japan (Nikkei-225) closed around 20627, almost flat (+0.06%) after rallying to two year highs yesterday on higher Yen today; USDJPY is now trading around 112.50, down by almost 0.31% on next Fed leadership worries and some confusions about US Tax reform bill.

For JP market, major exporters & automakers were mixed, while banks & financials dragged it today along with energies; JP Service & Composite PMI were also flashed as subdued, indicating a softer growth, although job creation remained modest on Sep.

Hong-Kong (HKG-33) stock future is now trading around 28355, up by almost 0.70% on China optimism after solid Chinese PMI data, targeted RRR cut by PBOC on the weekend coupled with upbeat GDP projection by the World Bank today.

Today HK market was boosted by property developers, automakers, banks & insurers and hopes for an enhanced Govt capex in the scheduled annual policy address next week.

Overall, global market sentiment is now being supported by solid fundamentals & growth story amid upbeat Mfg PMI across Asia/EU/US due to export boom amid coordinated orderly currency movements among the G-20 countries.

Meanwhile, Crude Oil (WTI) is now trading around 50.05, down by almost 0.70% after unexpected gasoline storage data in API report yesterday despite Iran oil minister jawboning about market stability. All eyes may be now of the official DOE data later today. Technically, sustaining below 49.95, the area of 49.65-49.35 & 48.55 may be clearly visible now amid production cut extension squabbling by OPEC & NOPEC beyond March’18.