Nifty jumped on hopes of Modi 3.0 and record RBI dividend

·         But India may be heading for a hung Parliament; If BJP wins less than 250 seats, then Modi may be replaced by Gadkari as the next PM for the new NDA

India’s benchmark stock index, Nifty (India 50 CFD) closed around 22932.55 Monday, edged down -0.11% after scaling a fresh record high of 23109.60 on hopes & hypes of Modi 3.0 with a blockbuster/comfortable majority, ensuring the continuity of Modinomics. On Monday, India’s incumbent HM Shah claimed in an election rally that he has the outcome of the election up to the 5th phase in his pocket, which indicates ‘Modi-ji’ has already won 310 seats and is on the way to a blockbuster majority of 400+ seats (for NDA), while ‘Rahul-baba’ (Cong) will win not more than 40-seats.

But Nifty also stumbled in the last hour of trading as there is significant uncertainty over the outcome of India’s election. And Shah’s election bytes may be a simple election strategy to boost up BJP supporters ahead of the 7th and last phase of the election on 1st June to win the maximum possible number of seats for improving the overall tally, which may not be looking great right now.

As HM/PM of the country, Shah-Modi may have early access to not only exit pools being done by various private polling organizations but maybe also regular IB reports about election trends. But as an experienced political leader, Modi-shah is also trying their best to look/sound confident, even if the election wind may not be in favor of them. Thus all focus may be now on the actual result of the election on 4th June, even if Modi-savvy Godi media/polling organizations may predict a comfortable win for Modi with 300/350+ seats in their exit pools on 1st June, which would be in sharp contrast to the present social media narrative of Modi/BJP winning around 200/225 seats.

As per reports, in an unusual move, incumbent/caretaker PM Modi (as Parliament is already dissolved and as par ECI MCC) didn’t attend any election meetings, or rallies Monday and extended the service period of Army and DRDO Chiefs, which may be indicating that Modi is himself not confident enough to return to PMO in July (as next PM) and thus hastily extended services of Army and DRDO chiefs to protect the interest of private arms/military equipment manufacturers/corporates like Adani group.

India is now aiming to produce military equipment locally by reducing imports by at least 30% and Adani group is now a major private player in this defense industry segment (like SRK’s JAWAN movie story!) On Monday, Modi also implemented some other crucial transfers of key officials without waiting for the next term from July or even after the 4th of July election result (very unusual for a caretaker PM and maybe also against ECI MCC), despite these crucial postings may be aimed at the interest of national security if the Parliament is in hung position next 30-60 days after the election result 4th June..

If BJP wins less than 250 seats, then Modi may be replaced by Gadkari as the next PM contender of NDA who has a moderate image and has good/cordial relations with almost every other political party across various states. If BJP indeed wins around 225-200 seats, BJP may need the support of additional regional parties that have not joined any alliance now officially. BJP may also need not only the support of its existing NDA allies but also some IND allies and in that scenario, Gadkari will be an ideal candidate rather than Modi due to the nature of vendetta politics and personal attacks by Modi.

As per reports, Monday (27th May) was the Birthday of Gadkari and almost all leading BJP leaders across various states have reached Nagpur to congratulate an unusually smiling Gadkari who may be the next PM candidate of the new NDA! Even a leading corporate house (Finolex) has published a front-page Birthday wish for Gadkari in a leading national newspaper, which may be showing growing support for Gadkari as the next NDA PM.

Looking ahead, in the near term, India’s stock/financial market will be influenced more by election outcomes; i.e. politics rather than economics. Indian market is now dancing more to the tune of ‘Sarkari Godi’ media (Modi savvy), which is predicting a comfortable Modi 3.0 with 300/350+ seats (similar to 2019) or even blockbuster 370/400+ seats.

This is in sharp contrast to Social media analysis consisting mainly of experienced journalists, political analysts, and even semi-psephologists actively surveying various big battleground swing states apart from having direct/indirect contacts with various political parties/local leaderships. Various social media analysts are now predicting around 200-225/250 seats of BJP/NDA; i.e. clearly hung Parliament with downside risk for the incumbent BJP.

 

As par ABPS, which is seen as RSS/BJP savvy (front?), BJP may get around 231 seats and BJP+ allies may also win around 19 seats, totaling around 250 seats for NDA. But some influential political analysts are predicting 285 seats for NDA (250+35) and 350 seats for NDA (315+40) after 5th phase of polling.

In any way, although FIIs are selling relentlessly and also carrying huge short positions in FNO, month-end short covering/rollover of positions also helped Nifty to scale 23000 levels last week. This along with equivalent buying support by DIIs, led by state-sponsored LICI and some value buying (when Nifty fell to around 22800 levels a few weeks ago) also helped along with renewed economic optimism after RBI surprised the market with a record amount of dividends to the government with around Rs.2.11T against expected/budgeted around Rs.1.05T.

The RBI bonanza of Rs.2.11T to the government for FY24 may help better fiscal discipline and higher spending by the next government, although, in reality, it may be another political stunt by the Modi admin aiming to improve the image of the government during this election, which looks very tough for Modi admin rather than the prior narrative of ‘Abki baar 400 paar’. Like any other major global central bank, RBI also transfers a part of its annual earnings every year to the government (promoter/primary shareholder).

RBI earnings mainly consist of interest on Indian sovereign/government bonds, which are paid by Federal and also various state governments on its bond/debt. Like any other major central bank, RBI is also one of the largest holders of government bonds and one of the biggest beneficiaries of interest being paid by the government on its debts. Like all other major Central Bank, RBI also transfers a part of its profit every year

RBI transferred divided to the government around Rs.0.87T in FY23, 0.30T in FY22, Rs.0.99T in FY21, Rs.0.57T in FY20 and Rs.1.76T in FY19. RBI transferred a comparatively higher amount of contingency provisions in FY22-20 for COVID-related disruptions. RBI goes for a lower CRB (contingency risk buffer) of 5.5%-6.00% due to COVID disruptions but now goes back to a higher CRB at 6.5% of RBI’s B/S in FY24 like in FY19 pre-COVID period (normal period and the economy is booming in almost all aspects-India is shining!).

RBI also earns big from interest income on its holding of foreign debts/bonds (mainly US TSYs) apart from regular trading/intervention of FX (mainly USDINR). RBI earned around Rs.0.97T and Rs.0.44T as interest on Indian and Foreign bond holdings apart from some gains/losses in regular trading of those securities/bonds in FY23. RBI also earns well in FX trading/intervention (mainly USDINR). RBI earned around Rs.1.03T and Rs.0.69T in FY: 23/22 from FX transactions. RBI may have transferred around Rs.1T more than the government budgeted for FY24. But this Rs1T may not change meaningfully India’s huge public debt (PDL) and fiscal discipline trajectory as the current public debt is now almost Rs.170T.

Apart from renewed optimism about Modi 3.0 with a blockbuster majority of 400+ seats (Abki baar 400 paar) and Modinomics, the Indian market sentiment was also boosted by record and unexpected RBI dividends of Rs.2.11T during election time, which may be aimed to improve the image of incumbent Modi government. The amount of Rs.2.11T as RBI dividend is higher than the BE/RE (estimate) in the FY24 budget, which may be used by the next government in fresh spending on infra and social security along with reduction of public debt/fiscal deficit. The global rating agency S&P Global said the reduction of fiscal deficit with higher RBI dividend may also be positive for India’s sovereign rating and outlook.

RBI usually publishes and announces yearly dividends to the government in the last week of May after closing books for the last FY on 31st March. But this time may be pressure from the Modi admin or purely coincidental, RBI held the annual board meeting on 22nd May’2024, just after two days of MH/Mumbai polling and ahead of the 6th phase polling date 25th May, and also the last 7th phase polling date 1st June’24. This may be an attempt by the incumbent Modi admin to improve the image of its government, now deeply under an anti-incumbent election wave, strong probability of a hung Parliament this time, and a depressed stock market.

On 22nd May, RBI issued a statement and announced a windfall/generous dividend of around Rs.2.11T for the incumbent Modi government:

“The 608th meeting of the Central Board of Directors of Reserve Bank of India was held today at Mumbai under the Chairmanship of Shri Shaktikanta Das, Governor.

The Board reviewed the global and domestic economic scenario, including risks to the outlook. The Board also discussed the working of the Reserve Bank during the year April 2023 – March 2024 and approved the Reserve Bank’s Annual Report and Financial Statements for the year 2023-24. The transferable surplus for the year (2023-24) has been arrived at based on the Economic Capital Framework (ECF) adopted by the Reserve Bank on August 26, 2019, as per recommendations of the Expert Committee to Review the extant Economic Capital Framework of the Reserve Bank of India (Chairman: Dr. Bimal Jalan). The Committee had recommended that the risk provisioning under the Contingent Risk Buffer (CRB) be maintained within a range of 6.5 to 5.5 percent of the RBI’s balance sheet.

During accounting years 2018-19 to 2021-22, owing to the prevailing macroeconomic conditions and the onslaught of the Covid-19 pandemic, the Board had decided to maintain the CRB at 5.50 percent of the Reserve Bank’s Balance Sheet size to support growth and overall economic activity. With the revival in economic growth in FY 2022-23, the CRB was increased to 6.00 per cent. As the economy remains robust and resilient, the Board has decided to increase the CRB to 6.50 percent for FY 2023-24. The Board thereafter approved the transfer of ₹2,10,874 crore as surplus to the Central Government for the accounting year 2023-24.”

 

To date, RBI didn’t publish its FY24 annual report, but as per FY23 annual report, RBI transferred divided to the government around Rs.0.87T in FY23, 0.30T in FY22, Rs.0.99T in FY21, Rs.0.57T in FY20 and Rs.1.76T in FY19. RBI transferred a comparatively lower amount in FY22-20 due to a lower CRB of 5.5%-6.00% amid COVID disruptions but now goes back to a higher CRB at 6.5% of RBI’s B/S in FY24 like in FY19 pre-COVID period.

Like any other major global central bank (Fed, ECB, etc), RBI is also one of the largest holders of government debt (bonds) and thus also one of the largest beneficiaries of interest being paid by the government on its debts. Similarly, RBI also receives a large amount of interest for its holding of foreign bonds (usually mostly US TSYs).

RBI earns big for its holding of local and foreign government debts/bonds coupled with active FX trading/intervention and usually transfers a part of this profit to the Indian government as dividends every year. The Federal government also accounted for it as part of other income (non-tax revenue) in its annual budget.

In FY24 (RE), the Indian Federal government has estimated around Rs.3.76T as other income (non-tax revenue), which includes RBI dividends (Rs.1.02T?) and also PSU dividends (Rs.0.52T?). In its provisional/final estimate of the budget in July’24 or in Feb’25, the government will show the actual amount received in this other income/non-tax revenue account, which may be a little higher than RE (revised estimate) shown during Feb’24 budget presentation as RBI transferred higher than expected dividend (to some extent) to the government. However, this may not result in significant improvement in fiscal deficit trajectory/numbers and the Indian Federal government continues to pay around 39% of total tax and non-tax revenue as interest on public debt; the same ratio is around 45% if we consider only core income/tax revenue.

The Indian government is paying incrementally higher interest on growing public debt and elevated bond yield/coupon rate of around +7%, perhaps the highest among comparable economies in G20. In FY04, the Indian Federal government paid interest of around Rs.1.24T, around Rs.3.74T in FY14, which jumped to around Rs.10.55T in FY24 (RE) and budgeted around Rs.11.90T for FY25 (BE) against fresh projected borrowing around Rs.17.35T in FY24 (RE) and Rs.16.85T in FY25 (BE); i.e. almost 60% and 70% of fresh borrowings in FY24 and FY25 is being used to meet as only interest payment for previous debt. This is like a bankrupt company, which is borrowing fresh just to make payment of accumulated interest of previous debt!

India’s Federal public debt & liabilities (PDL) was around Rs.17.24T in FY04 (33.95% of real GDP), Rs.55.87T in FY14 (57.00% of real GDP), further jumped to around Rs.168.73T in FY24 (97.59% of real GDP) and projected around Rs.183.67T in FY25 (almost 100% of real GDP). Although most of the Indian public debt is in LCU (local currency unit-INR), not in FX (USD), higher public debt even in LCU means the vicious cycle of higher money printing, higher inflation, and higher borrowing costs not only for the government, which is the most qualified borrower but for the overall economy (business and personal borrowers) and the economy becomes more and more costly (high cost economy).

Market impact:

Nifty surged around +1.45% in May (till 27th) after a similar move in the last three months; overall, Nifty has been in a consolidating mood since Jan’24 after the start of India’s general election season. Nifty gained almost +4% YTM (2024); i.e. is consolidating with a positive bias around life lifetime high amid hopes & hypes of blockbuster Modi 3.0. But the overall Modinomics optimism faded in the last few months since Feb’24 after the exposure of the Electoral Bond scam, denting the so-called corruption free image of BJP/Modi followed by various political narratives/controversial comments by both sides of the political spectrum.

The 2024 general election was looking ‘one-sided’ in favor of Modi in Jan’24 (‘Aab ki baar 400 paar and Ayega to Modi-hi’). But now that narrative has largely changed and the election is now looking like an exciting IPL (Indian Political League) T-20/T-50 or even a marathon series of seven (phases) test march series. Thus the market is also consolidating in a narrow range; Nifty made a recent low around 21822 and then recovered to a new life time high around 23109.60 Monday (27th May 24) as most of the mainstream TV/Sarkari Godi Media are still predicting a comfortable or even a blockbuster Modi 3.0, which is in sharp contrast to Social Media analysis of hung Parliament with a downside risk for BJP winning around 200 seats.

In any way, after the actual result on 4th June, we may see various political permutations & combinations involving various regional parties, and even pre-poll NDA and IND alliances. In politics, there are no permanent friends and foes, but Modi may have closed all alternative options for his extensive use of money, PMLA muscle, and personal attacks. Also, most of the BJP and RSS leaders do not prefer Modi as the next NDA PM due to his arrogant nature with totalitarian behavior and rapid Congress Jukta BJP rather than Congress Mukta Bharat!

India’s Dalal Street was also supported by a largely better than expected report card of corporate India in Q4FY24. In the last three months Nifty was boosted by HDFC Bank (upbeat report card), Bharti Airtel (upbeat report card and satellite internet spectrum), M&M, ICICI Bank, SBIN, Axis Bank, Tata Steel, Hindalco, Maruti, ITC, L&T, NTPC and Adani Ports, while dragged by INFY, HCL TECH, TCS, RIL, Sun Pharma, Wipro, Titan, DRL and Indusind Bank. Overall, in the last 30 days, the Indian stock market was boosted by automobiles, metals (Chinese infra/fiscal stimulus), realty6, infra, energy, banks & financials, FMCG, techs, and pharma, while dragged only by media stocks.

Technical trading levels: Nifty Future

Whatever the narrative, technically Nifty Future (23015) now has to sustain over 23250 for any further rally to 23400/23525-23650*/23850-24075 and even 25000-26000 levels in the coming days/weeks (if Modi indeed comes to power again with comfortable majority of 300/350 or even 400+); otherwise sustaining below 23200/23150-23050/22850*, Nifty Future may fall again to 22600/22450-22350/22150 and 22000/21800*-21600*/21500 and further to 21175/21000*-20400/20000* and even 19700/19400-19200/18800 and even 18500*/17500-17300/15650 in the coming days (at least initially, under hung Parliament like scenario; if BJP/NDA indeed gets around 200 seats or INC/IND set to form the next government).

Conclusions:

Even if BJP/Modi fails to form the next government and Nifty slumps 20%, it will be a wonderful opportunity to invest in blue chips at cheap/discounted valuation as IND/Cong policy may be at par with NDA/Modi or even better (if we compare previous performances); on the other side, if Modi/BJP/NDA indeed wins a comfortable majority this time with 300/350+ seats, then Nifty may jump another 10% to around 25000-25500 levels rather than 20% to 27500-28000 levels as market is already discounted to a great extent amid DIIs (Indian PPT) support. In that scenario, it may be also a wonderful opportunity to book windfall gain at a steep valuation and to enter again at lower/reasonable levels after some weeks/months. Unlike 2014 and 2019, this 2024 election is full of uncertainty and nothing is impossible in politics/actual election outcome. Thus, traders/investors may employ some types of hedging strategy like buying cheap/OTM CE and PE both assuming +/- 10/20% movement on any side after exit polls/actual result.