Nifty may recover on hopes of RBI cut and BJP win in MH & JH

·         ·         But still at around 23500 Nifty and 877 TTM EPS (Q2FY25), the current TTM Nifty PE is 26.80, still around the bubble valuation zone

·         Also Nifty is now getting a boost for policy continuity as the term of RBI Governor Das may be extended

·         RBI, under Das, may heed the Modi admin and begin cutting rates from December based on core CPI, which has been hovering below 4% for the last year rather than waiting for elevated total CPI

·         Also, India’s legacy issue of double-digit food inflation is an issue of constrained supply against growing demand for a huge population of almost 1.45B, which can’t be resolved by RBI directly

·         The government needs to enhance the supply capacity of the economy, especially daily food items to balance with growing demand and control inflation; also political & admin corruption is a major issue

·         RBI Governor Das is now also emphasizing on ‘global economic slowdown’ and the question of financial stability; but sees no major issues with India

·         But India’s unemployment rate surged above 10% in October and remained above 8% on average for at least the last two decades

·         Wall Street is almost flat on fading hopes of a Fed rate cut in December and escalating Ukraine war tensions; Gold and Oil got a boost.

 

India’s benchmark stock index, Nifty closed around 23462.70 Monday (18th November), edged down -0.30% on negative global cues amid fading hopes of another Fed rate cut in December’24 and escalated Ukraine war tensions. Overall, India’s Nifty crumbled almost 11% from a recent life time high of around 26277 in October’24 to 23350 mid-November on subdued report card (Q2FY25), bubble valuation (TTM PE around 30), concern of Trump trade war 2.0, elevated & stocky inflation and hawkish RBI, still not in a mood to cut.

At around 23500 Nifty and 877 TTM EPS (Q2FY25), the current TTM Nifty PE is 26.80, still around the bubble valuation zone.

Late last week Thursday, Russia launched a ‘huge’ missile/ attack on Ukraine’s electrical grid/energy infra ahead of the winter season. Subsequently, on Sunday there was a report that Biden admin/US and also the UK, Germany, and France may allow Ukraine to use their weapons/missiles to strike deep inside Russia. German and French leaders also pointed out that after Trump won, Putin is sounding more hawkish and not in a mood for an imminent ceasefire or peace talks.

Meanwhile, the Kremlin also warned about ‘serious consequences’ if the outgoing Biden admin indeed aims to escalate the Ukraine crisis. The market is now concerned about mini WW-III even before Trump takes charge of the White House/NATO/G7. Subsequently, Gold, Silver, and Oil got some boost, while Wall Street, Europe, and also India’s Dalal Street stock/index Futures slipped.

On early Monday, India’s Nifty also slid by almost 300 points from Friday closing levels of 23532.70 to 23350.75, at five months low (since June’24 pre-election days), but recovered to some extent to close around 23462.70 on hopes of RBI rate cut in December and also BJP/NDA win in Maharashtra (MH) and Jharkhand (JH) state election; exit poll will be out on 20th November and exact poll (actual result) 23rd November.

Although the INC/IND alliance was in the leading position after the recent General election, the ruling BJP/NDA managed to consolidate its position by delaying the election around 2-3 months and launching various ‘dole money’ schemes officially and unofficially to lure BPL/APL (below/above poverty line) voters (vote for cash scheme). Also, various strategic blunders by INC/IND allies like we have seen during the Haryana election may be going against them.

In any way, the election outcome in Maharashtra and Jharkhand may be very close and if BJP/NDA indeed wins by hook or crook, it may not only help to consolidate the political position of PM Modi within his party/organization (BJP/RSS) to continue full term till mid-2029 but may also help Modi 3.0 to take bold economic reform and to improve the productivity of India, which is the ultimate. If the productivity of an economy does not improve in line with underlying economic growth (GDP) including average wage growth, then the economy will run too hot, and price stability (inflation) will be an eternal issue.

Indian economy now needs much lower borrowing costs rather than almost double digits to encourage higher discretionary consumer spending, private CAPEX, economic growth, and employment. India also needs lower indirect taxes on goods & services (GST/tariffs etc), proper policy reform, and lower energy costs for a robust manufacturing sector and quality jobs for even low-skilled masses. India needs to follow the US/EU model of electoral politics (rotational leadership through internal discussions, debate, and voting), political/electoral campaign funding (transparent government, corporate and retail funding), and the Chinese model of rapid development by involving state and local along with Federal government to be a developed economy in terms of GDP/Capita by 2047 or even 2100.

The Indian model of electoral politics, policies, and political funding & rampant corruption are some of the primary reasons behind India’s K-shaped economic growth, growing inequality, and elevated & sticky inflation. Whoever (NDA-UPA) controls Federal and state governments, India’s combined public debt & liabilities (PDL) are now growing at unsustainable levels; almost 45% and 40% of Federal core tax revenue are now going to paying interest on Federal public debt and government salary & pensions, leaving very little for infra (traditional + social) after provisioning for ‘Helicopter Money’ (dole money politics).

Indian political/electoral expenses are now running into trillions of rupees, which is eventually boosting public debt, currency devaluation, and inflation. No individual or corporation will fund huge amounts to political parties and election expenses from its pocket; it will utilize proceeds from government contracts, stock/financial market, and even windfall profit from its own business to fund such political activities, which will eventually boost public debt.

On Saturday (14th November), RBI Governor Das said in a media and educational conclave:

·         Now the elephant (elevated inflation) has gone out of the room for a walk, then it will go back to the forest

·         When the Ukraine war started, inflation went up, then we immediately avoided negative interest rates

·         In many countries inflation was deep-rooted but ours is moderating

·         The Indian economy remains strong and I would say very robust and we are much better placed than perhaps the rest of the world.

·         Inflation has gone up in the last two months, but on the whole, it’s expected to moderate in the coming months.

·         However, the Indian economy is very stable, thanks to factors like the external sector.

·         Our current account deficit last year was 1.1 percent as against 7 percent in the 2010-11 period. It is well under control in the first quarter of this year.

·         Our reserves have gone up significantly.

·         The latest figures put the same at $675B, the fourth highest in the world, and enough to meet the requirements of 12 months of imports or meet any other parameters.

·         The Indian economy is withstanding global risks.

·         However, there is no room for complacency, as there are many challenges like the effects of geo-political conflicts, economic fragmentation resulting in supply-chain disruptions, the challenges of rising import duties (Trump trade war 2.0), or even climate change issues.

·         Also, chief areas on which the country should focus while moving forward – continue with ongoing structural reforms especially that regarding land and labor, adopt a multi-sectoral approach of development, move towards greater formalization of the economy (GST, UPI, etc), and widen the credit delivery system.

·         The RBI Innovation Hub in Bangalore has come out with a product called Universal Lending Interface (ULI). It’s going to be a transformational change in credit delivery, like what UPI has done about payment systems in India.

·         Global growth is holding on. But there are signs that it is (again) slowing down.

·         However, India has been an exception.

·         The economic recovery that India made after the pandemic was one of the best.

·         When every country is facing a growth slowdown, the Indian economy in the last three years, has recorded an annual growth rate of 8%

·         The RBI growth projection for the current year is 7.2% while many international agencies like the IMF have given a growth projection of 7.0%

·         So, on the whole, the Indian growth story remains resilient, the Indian economy remains strong and I would say very robust and we are much better placed than perhaps the rest of the world.

Full text of relevant part of speech by RBI Governor Das: 14th November’24

“In recent years, the global economy has gone through a period of continual and unprecedented shocks. This was a period of “Great Volatility” as distinct from the earlier era of “Great Moderation”. Complex and varied shocks of a global pandemic, supply chain disruptions, wars, geopolitical conflicts, and climate change hit the global economy very hard. These were not typical shocks dealt with in textbooks or having standard policy responses. Sailing through this turbulent period has, therefore, been a daunting challenge for every country including India.

Current Global Context

After almost a synchronous adoption of expansionary policies following the pandemic, central banks across the world resorted to an equally synchronous monetary policy tightening when high inflation bounced back in the face of supply chain disruptions and the war in Ukraine. Overall, these policies across the globe appear to have worked well. Soft landing has been ensured, but risks of inflation coming back and growth slowing down do remain. The headwinds from geopolitical conflicts, geo-economic fragmentation, commodity price volatility, and climate change continue to blow.

During this entire period of great volatility, maintaining price and financial stability have posed difficult trade-offs, as evident – among others –from the banking sector turmoil in certain advanced economies in 2023. The challenge is always between doing too little or too late on the one hand; and doing too much or too early on the other. Reading the interplay between monetary policy actions and the developments in the financial sector as well as the evolving situation correctly, and timing the decisions are always challenging. Central Banks have by and large performed well this time around.

In this challenging global environment, let me highlight certain contradictions globally that we observe at the current juncture. First, government bond yields are rising even as many advanced economies have embarked on an easing path through rate cuts, underscoring the fact that treasury markets are influenced by a host of global and domestic factors that are much beyond mere policy adjustments. Incidentally, even the US dollar is appreciating although the FED is cutting rates.

Second, undeterred by the strong US dollar and higher bond yields, prices of gold and oil - the two commodities that typically move in tandem - are showing sharp divergence.

Third, an interesting contrast is also emerging between rising geopolitical risks and financial market volatility. While geopolitical tensions have escalated steadily in recent years, financial markets have shown considerable resilience in the face of mounting uncertainties.

Fourth, global trade is projected to remain higher than the previous year notwithstanding the sanctions, tariffs, import duties, rising cross-border restrictions, and supply chain disruptions.

Fifth, emerging market economies (EMEs) have shown greater resilience than advanced economies (AEs) in the current phase.

Indian Context

Amidst these headwinds and contradictions, the Indian economy is sailing through smoothly, powered by buffers like strong macroeconomic fundamentals, a stable financial system, and a resilient external sector. We have endeavored to seize every opportunity to further strengthen our fundamentals through a prudent and proactive policy approach. Our prime focus has been to maintain financial stability, which breeds growth and prosperity.

In 2019, we faced severe stress in the non-banking financial company (NBFC) sector. Liquidity had dried up and there was a crisis of confidence in the financial markets. There were also certain instances of bank stress, both in commercial and cooperative banking sectors, in recent years. In all these exigent situations, the Reserve Bank took effective measures to stem the crisis from snowballing and restore stability and confidence in the markets. In parallel, we strengthened our regulatory architecture and supervisory vigil to proactively identify weaknesses and be future-ready. It is, therefore, appropriate to reflect on our experience during this period, not just – if I may say so – as a success story but, more importantly, to draw lessons for the future.

When the COVID-19 pandemic hit us, our response was swift and decisive. We put in place business continuity measures even before the nationwide lockdown was announced. We set up a special quarantine facility, with about 200 officers, staff, and service providers, to ensure continuity in financial market operations and payment systems. All regulated entities were advised to take immediate contingency measures to ensure business continuity and manage their risks.

Monetary Policy and Liquidity Operations

Monetary policy has completed a full cycle in the last six years – an easing cycle during 2019-22 and a tightening cycle of equal magnitude thereafter. We have used the flexibility embedded in flexible inflation targeting (FIT) to prioritize growth or inflation depending on the prevailing conditions and the outlook. For instance, when economic activity came under severe stress during the COVID-19 pandemic, we prioritized growth over inflation cut policy rates, and infused huge liquidity into the system. These measures were nuanced, keeping in mind the price and financial stability challenges that may arise in the future. In addition, forward guidance during the easing phase complemented and reinforced monetary policy and liquidity measures. In parallel, appropriate regulatory measures, consisting of a moratorium on repayment of loans and resolution frameworks for stressed loans were also announced.

Later, when the Russia-Ukraine war caused massive supply disruptions in key commodities and threatened inflation to get out of control, we shifted our focus from growth to controlling inflation. We frontloaded our monetary policy actions and changed our stance to withdrawal of accommodation. We remained nimble and agile in our liquidity management operations. Further, fiscal-monetary coordination – Reserve Bank’s rate hikes along with proactive supply-side measures by the Government – helped in controlling inflation and anchoring inflation expectations.

Coming to a more recent period, the MPC in its meeting on October 7-9, 2024 took note of the prevailing and expected inflation-growth dynamics and decided to change the monetary policy stance from the withdrawal of accommodation to ‘neutral’. It also decided to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth. The change in stance provides greater flexibility and optionality to act in sync with the evolving conditions and the outlook.

Overall, while average growth during 2021-24 remained buoyant at above 8.0 percent, the receding of headline inflation in 2023-24 and 2024-25 (up to September) to within the tolerance band bears testimony to the success of the Reserve Bank’s policies. What is equally important is that all these actions did not undermine financial stability.

Our rate hikes were preceded or accompanied by prudent risk management practices in the form of greater flexibility to banks in holding government securities under the held-to-maturity (HTM) category that minimized marked-to-market losses. It is evident that while designing our responses to both the pandemic and the inflation upsurge, our policies were nimble, flexible, and balanced. We remained consistent with our mandate of “price stability while keeping in mind the objective of growth”. The underlying mandate of maintaining financial stability was also adhered to.

Central Bank Communication

During this entire period, communication became an important tool to complement our policy actions. During the pandemic, we endeavored to give confidence to the wider economy, financial markets, and the public at large. In the monetary policy statement on April 17, 2020, in the early part of the lockdown, I said “Although social distancing separates us, we stand united and resolute. Eventually, we shall cure; and we shall endure”. We began using quotes from Mahatma Gandhi like “….in the midst of death life persists…. during darkness light persists” (April 17, 2020); “It is when the horizon is the darkest and human reason is beaten down to the ground that faith shines brightest and comes to our rescue" (May 22, 2020); and similar other quotes.

In particular, I would like to refer to my December 2023 statement following the macro-prudential measures undertaken on November 16, 2023: “Financial stability is a public good…….we do not wait for the house to catch fire and then act. Prudence at all times is our guiding philosophy.” The spirits behind these statements are key to withstanding a period of multiple crises. Our communication was backed up by appropriate policy actions. Communication played a critical role in maintaining stability in the turbulent times of the recent past.”

On Saturday, India’s influential Minister of Commerce Goyal said:

·         RBI must cut interest rates. It’s a flawed theory to consider food inflation for choosing cutting rates. This is my personal view for the last 22 years, since I was in the opposition and not that of the government.

Talking about India’s inflation, the latest MOSPI data shows India’s annual (y/y) total CPI (inflation) increased by +6.2% in October’24 from +5.5% sequentially, above the market consensus of +5.8% and the highest since November’23. In Sep’24, India’s total CPI was boosted by food (10.87% vs 9.24% in September), which accounts for nearly half of the price basket. Prices surged for vegetables (42.18% vs 35.99%), oils and fats (9.51% vs 2.47%), and meat and fish (3.17% vs 2.66%). In turn, inflation also rose for housing (2.81% vs 2.78%), while deflation slowed for fuel and light (-1.39% vs -1.61%).

On a sequential (m/m) basis, India’s total CPI surged +1.3% in October’24 from the prior month’s 0.6%.

Overall, India’s 6-month rolling average (6MRA) of CPI inflation was around +4.8% in October’24 against +4.6% in the last report, while the 3-month rolling average was +5.1% in Oct’24 against +4.2% in the last month. The 2024-YTM average CPI was around +4.9% in October’24 against +5.7% in 2023. Also, the 6M rolling average of sequential (m/m) CPI was +0.9% in October’24.

India’s 6M rolling average of core CPI was around +3.2%, while the same for the unemployment rate was around 8.3% (Sep’24). In the long term, the average rate of India’s total CPI is +5.8%, core CPI +5.6%, unemployment rate is 8.2%, and average real GDP growth is around +6.0%.

Unofficial derived data shows, India’s annual (y/y) core CPI increased +3.8% in October’24 from +3.6% sequentially. Although India’s core disinflation stalled and reversed from June’24, it’s still hovering below RBI’s target of +4.0% since Dec’23. India’s 6M rolling average of core CPI was around +3.4%, in October’24, below RBI’s target of +4.0%.

India’s unemployment rate remains around 8.0% on average, almost at double-digit levels for the last two decades. In October’24, India’s unemployment rate surged to 10.1% from 7.8% sequentially.

For the longer term, the average rate of India’s total CPI is +5.8%, core CPI +5.6%, unemployment rate is 8.2%, and average real GDP growth is around +6.0%. India’s unemployment rate has remained around 8.0% on average for the last 20 years and if we take into account under-employment, it should be in the high double digits around 20-25%, while the educated youth unemployment rate may be around 45-50%. India is primarily a service sector and also an import-oriented economy, especially for oil, various industrial commodities, raw materials, and finished products/consumer durable goods.

India has immense potential in improving its manufacturing sector with the right policies in place to not only become less import-dependent but also become one of the largest exporters, competing with even mighty China and becoming a real democratic alternative to China in terms of a global manufacturing hub. But for that, India also has to improve its mining & querying activities along with huge stress on innovation & productivity and lower cost of production. India needs proper labor & land reform and an appropriate indirect tax policy to boost manufacturing mass-employment.

India’s real GVA growth trend may be indicating an underlying R/R of around +7.0% (y/y), lower than the real GDP R/R potential mainly due to comparatively higher taxes on goods & services. India’s GST and other indirect taxes are now the highest contributor of Federal revenue around Rs.14.80T followed by corporate/business tax Rs.10.22T and personal tax Rs.9.23T in FY24. India needs now GST tax reform without frequent changes in rates and multiple slabs.

As revenue revenue-neutral strategy, India should apply a 15% uniform GST rate across all goods and services including petroleum products. India’s CII has prescribed three slabs/rates for GST with the inclusion of petroleum products. The Indian government may further encourage a new personal income tax regime with some structural modifications and may even abolish the old tax regime from FY26.

In FY24, India’s total tax revenue was around Rs.55T against nominal GDP of around Rs.295T; i.e. almost 18.5%, which is at par with the global AE standard, despite only around 3% of people paying any personal income tax (despite heavy compliance tax network). This is because a vast majority of the population has very low income and need not pay any income tax at all. Also, there are various tax savings incentives, and thus government may streamline those incentives to collect a respectable income tax to reduce high GST/indirect taxes, which has also caused a higher cost of living over the past few years.

Although there is a rumor that from FY25, the Indian Federal Government may abolish the personal tax code and instead continue with direct/GST tax codes. However, the Government may abolish the old tax regime and keep the new tax regime with fewer tax slabs and without any tax deduction provisions related to investments.

But India also needs out-of-the-box ideas or monumental reforms in various aspects like labor & land reform (rather than a mere political narrative) for a developed economy by 2047-50 or even by 2100. India also has to strengthen institutional autonomy in the judiciary, press, election commission, competition commission, etc along with political funding and electoral process reform. India (Federal Government) now pays almost 45% of core tax revenue as interest on public debt and 35% on account of government salaries and pensions.

India also needs monumental economic reforms in various aspects like labor & land reform (rather than a mere political narrative) for a developed economy by 2047-50 or even by 2100. India also has to strengthen institutional autonomy in the judiciary, press, election commission, competition commission, etc along with political funding and electoral process reform. India (Federal Government) now pays almost 45% of core tax revenue as interest on public debt and 35% on account of government salaries and pensions. Indian Federal & state combined public debt & liabilities (PDL) is now around INR 275T, approaching 100% of the country’s nominal GDP.

Although most of the Indian PDL is in LCU (local currency units-INR), the cycle of higher deficits, debt devaluation and subsequent higher borrowing costs/higher inflation is making India a high-cost economy. This along with the lack of adequate employment opportunities for India’s huge pool of educated youths over the last few decades may create social unrest in the country, if not properly handled by the policymakers. Thus Indian Federal government needs to give RBI a dual mandate of maximum employment and price stability (like the US Fed).

Also, the Indian government may need a more personal tax collection system (like in the minimum payroll/social welfare taxes) along with non-strategic PSU disinvestments to fund modern social and traditional/transport infra in the country for ease of living. For this two main political parties (BJP and INC) should come into some bipartisan politics/economics supported by the corporate/business/ordinary public of the country.

Overall, despite incremental improvements in the last few decades, India is still far behind China in terms of infra (traditional, transport, and also social). Thus there is a huge scope for improvement for India’s ailing infra, especially railways and also education & healthcare to match with growing/huge demand for a huge/still growing population of almost 1.50B of the country.

India has now a natural economic growth of around 7-8% (real GDP) due to its large population and growing affluent middle class along with huge/growing government spending and service/IT/petroleum products exports. But India needs to grow in double digits (at least 10-12%) in real terms keeping USDINR and core inflation at manageable levels for the next 15 years to be able to become a true $5T economy with inclusive growths; not exclusive/K-Shaped and jobless growths like at present.

India needs to put proper tax and policy structures in place to encourage domestic manufacturing of quality goods for export so that it can compete with China and other Southeast Asian exports, which will eventually create mass employment (like in China). For all these, India needs lower borrowing costs for much higher private and public/government capex to improve the overall supply capacity of the economy along with manufacturing boost to become a developed economy by 2050-2100.

Thus looking ahead, despite the average total CPI being around +5.0% on average, RBI may go for rate cuts from Dec’24 as India’s average core CPI is now around +3.0%, while the average unemployment rate is around 8.0%. Although officially Modi government claims India’s unemployment rate is around 3.2% (??), perhaps at almost the lowest in G20 and the Indian economy is now at maximum employment amid the deluge of casual low-paid workers like SWIGY delivery boys! Indian Government/NSO should publish proper employment situation, core inflation, and retail sales data every month like in the US so that policymakers can make proper policy decisions for maximum employment and 3% price stability along with double-digit real GDP growth of at least around 10-12% for becoming the 3rd largest economy by 2050 in terms of real GDP at $5T.

India’s Dalal Street may be now looking for RBI Pivot to match with Fed/ECB/PBOC:

As per Taylor’s rule (modified), India’s longer-run terminal/neutral RBI repo rate should be around 4.00-4.50% to balance price stability (core CPI around 3.0%), maximum employment (95% of labor force) and adequate economic activity (real GDP growths at least +6.0%).

As the Fed has already started the latest rate cut cycle of 275/250 bps rate cuts over the next several quarters (September 24-December’26-June’27), RBI has to follow the Fed to keep interest rate/bond yield differential and FX rate (USDINR).

RBI officially indicated a change of stance in the Oct’24 MPC meeting and had gone for a dovish hold. But RBI may publish a report about targeting core inflation rather than total inflation/CPI, and may officially begin targeting core CPI from Dec’24 or Apr’25 MPC (new FY26). Thus RBI may start cutting rates by a -50 bps or -25 bps rate cut in Dec’24 depending upon the actual/likely Fed move. Thus RBI may also cut cumulatively 2.00-1.50% depending upon actual core inflation and Fed rate trajectory for a terminal repo neutral rate of 4.00-4.50% against Fed’s 3.00-2.75% by Dec’26.

Conclusions:

Looking ahead, after the US election, the focus of the Indian market is now on Trump’s comments and actual policies. Domestically, India’s Dalal Street may now focus on Maharashtra and Jharkhand state elections, in which it now seems that BJP/NDA/Modi 3.0 is now leading with a slight edge over than INC/IND coalition contrary to earlier perceptions. BJP/Modi 3.0 is employing huge financial muscle along with Operation Lotus and other election tactics in Maharashtra, but it remains to be seen whether voters of Maharashtra vote for Helicopter Money or Marathi pride.

In any way, if BJP/NDA/Modi 3.0 manages to win in Maharashtra and Jharkhand after the unexpected win in Haryana, it will help Modi 3.0 to consolidate his position both in the party (BJP/RSS) and also overall public image after the ‘debacle’ in recent General election (June’24). In that scenario, expect some relief rally in Nifty from around 23000 levels; otherwise, expect 22500-22300 levels on Nifty in the coming days.

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future/ India 50 CFD (23500) has to sustain over 24000/24200-24500/24600 for any further rebound to 24700/24900-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 23950/23850-23700/23400, India 50 may further fall to further to 23100/23000-22850/22700 and 22450/22150-21250/21000 in the coming days.