Nifty Snapped 3-Days Losing Streaks on Hopes of Further Infra and Reform Push

  • by THO
  • 2 weeks ago
  • news
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India’s benchmark stock index (NSEI) closed around 18102.75 Thursday, jumped almost +1.28%, snapping 3-days losing streaks on hopes of further infra push. India’s FM Sitharaman will interact with CMs, UTs on Monday (15th Nov) to discuss CAPEX, big-ticket infra projects, and economic recovery so far.

On Friday, the Indian Finance Secretary Somanathan said:

“There is a lot of positive sentiment from global investors regarding investment in infrastructure–this should be capitalized upon; but several things needed to place India on a higher growth path, lie in the hands of the states. Joint action by centres and states will put India on a higher growth path. We hope each state will have a clearer appreciation and picture of the state-specific issue.

The upcoming discussions between FM Sitharaman and states’ CMs will tie-up with the Centre’s GatiShakti Initiative. It was launched by Prime Minister Narendra Modi on October 14 for multi-modal connectivity in a bid to bring India’s infrastructure development on a common path. The prime minister’s office had said the GatiShakti project will break departmental silos and institutionalize holistic planning for the stakeholders across major infrastructure projects.

Seven states have met and claimed additional borrowing in the first half of the fiscal year 2021-22. States like Chhattisgarh, Kerala, Madhya Pradesh, Punjab, Rajasthan, Telangana, and Meghalaya have sought an additional borrowing worth 16,691 crores, in lieu of capital expenditure.”

The Economic Affairs Secretary Seth said: “A lot of issues and clearances on infra projects require state cooperation. Several states have their own industrial policy. The interaction will not only be about what the government can put into the economy but also facilitate private investment—several states have set up databases of land banks”.

The market was oversold to some extent and there was some short-covering from important support levels and thus the above news headline acted like a trigger. In any way, in a Democracy like India with its unique State-Federal structures, the Federal government is dependent on States for the implementation of policies and projects. Thus cohesion/coordination between Federal and State governments is vital for the further development of the country. India is already enjoying EM scarcity premium and is a hot investment destination among EMs (except China) due to political and policy stability and the attraction of 5D (democracy, demography, demand, deregulation and digitalization).

There is a huge scope of infra improvement in India, especially transport and real estate. In India, the average speed of normal railways is still around 55 kmph, almost the same for the last few decades (against China’s more than 100 kmph-except bullet trains). India now has electrified most of its railway network, has improved locomotives and LHB coaches to withstand speed up to 160 kmph, but due to poor rail/network infra, the average speed is only around 55 kmph.

Thus there is a vast opportunity for India to improve its normal rail as well as high-speed rail network (lines, signalling, safety system etc) and huge scope for public & private investments. India now needs investment-led growth, which is only possible with the active cooperation and coordination between the center/Federal and states, even if there are political differences.

India’s fiscal position is now improving gradually amid healthy tax collection and prudent spending by the government. As of 30th Sep’21 (H1FY22), the revenue/budget deficit was around Rs.5.27T. The Federal revenue was around Rs.10.99T, almost 60.4% of BE. Tax revenue was around Rs.9.21T, non-tax revenue Rs.1.60T and non-debt capital receipts Rs.0.18T. The buoyancy in tax revenue was on account of higher customs duties and corporate taxes.

The total spending was around Rs.16.26T, comprising Rs.13.97 on revenue and Rs.2.29T on capital account. The Federal government paid Rs.3.64T as interest payment on public debt and Rs.1.81T on account of major subsidies/grants. In H1FY22, the ratio of interest payment/gross revenue was around 33% against 43% in FY21 and 35% in FY:19-20. Thus we may expect a lower interest payment/gross revenue ratio in FY22, especially after LIC IPO and some other PSU monetization.

In brief, there is spare capacity for quality employment, direct tax revenue, and economic growth in India. The need of the hour is targeted fiscal stimulus and structural reform to improve the country’s productivity, which is the ultimate.

EarlierNifty stumbled on negative global cues and potential RBI tightening to control inflation:

India’s benchmark stock index Nifty (NSEI) closed around 17873.60 Thursday; tumbled almost -0.80% on negative global cues and potential RBI tightening to control inflation. Nifty stumbled from a post-Muharat session high 18112.60 on negative cues from Wall Street as Fed may tighten earlier than expected to control uncontrolled Bidenflation. Earlier Wall Street as well as Dalal Street was boosted on Fed’s patience for liftoff and as Fed was able to taper without a tantrum. Fed Chair Powell was also sounded less hawkish on liftoff, even as Fed is now preparing the market from QE tapering to tightening.

Now from global to local, India’s Central Bank RBI is also an avid follower of the Fed, whatever may be the rhetoric. RBI is now preparing the market from tapering to tightening. On Wednesday, RBI Governor Das said in a media summit that a large part of the pandemic liquidity has already come back to the Central Bank and RBI is now closely watching both headline inflation and core inflation trajectory amid rising energy/commodity prices. But RBI/Das also pointed out a reduction in excise duties by the Federal Government on petrol and diesel as a positive step for inflation management. Das also appreciated government steps to address supply-side and higher tariff issues on edible oils and pulses.

Das said:

TLTRO and LTRO that we gave during the pandemic period have come back to the Reserve Bank of India and out of total liquidity that was injected a large part of it have come back—to prevent excessive volatility in the foreign exchange market, the RBI had to intervene and added to a lot of liquidity during the pandemic times–almost all measures taken by RBI during the pandemic seem to have worked and the supply side factors are being addressed by government and have augured well for the inflation scenario.RBI is keeping a close watch on core and fuel inflation and will have to wait and see.

I expect the RBI’s projection of 5.3% inflation to sustain but am also watchful and careful if a fast developing scenario emerges—The excise duty cut on petrol and diesel is positive for inflation. It is significantly positive for inflation (management). Traditionally our inflation has been mainly caused by supply-side factors, but fortunately, that has been addressed by the government—has been managed well this time, helping food inflation to be brought under control—however, core inflation still remains elevated and needs to be addressed.

Food inflation started off first with edible oils; then moved onto pulses and then fuel inflation added to it. But having addressed the supply side issues well, made pre-excise duty cut, we should be able to meet our forecast of 5.3% of the year ending March—So, food inflation by and large looks to be now under control–So far as we are concerned, our expectation is that it will be in line with our projection of 5.3% for the full fiscal, and the petrol and diesel price cut was not priced in this forecast–Now, it looks this is very positive for inflation management–So, we are sticking to our last projection. All these measures have contributed to bringing down retail inflation and augur well for its management.

As far as we are concerned, core inflation has always remained elevated, and that is a policy challenge, and we are keeping a very close watch on the evolution of core inflation. Globally, the inflation outlook is grim given the rising energy and steeply rising prices of commodities like crude and steel. Though some of them have already peaked, we have to be very careful”.

Normalization or unwinding is not the word, I use rebalancing and most of the liquidity measures had a sunset date (CRR, LTRO, TLTRO) — today India is in a much better and comfortable position and the forex reserves give better confidence to deal with (Fed) taper”.

Now, it’s almost clear that as an avid follower of the Fed, India’s Central Bank RBI will also shift its focus on inflation management; otherwise, the bond yield curve will be out of control and India’s borrowing costs will further soar. On Friday evening, the MOSPI data shows that India’s headline CPI increased by +4.48% in October from +4.35% in September, higher than the market expectations of +4.32%. On a sequential (m/m) basis, the CPI jumped +1.41% most since May’21. Overall, the average sequential rate of increase in CPI is now around +0.59%; i.e. an annualized rate +7.06%, while the average yearly (y/y) rate is +5.11% (till Oct’21), much above RBI’s target +4.0%, but within RBI’s FY22 forecast of +5.30%.

Bottom line:

India is a high cost/tax economy; the indirect taxation rate is abnormally higher, leading to a higher cost of products & services and the resultant inflationary spiral and higher cost of funds/borrowings. RBI has to control Modiflation like Fed has to control Bidenflation. In India, inflation is going to surge more on elevated oil/commodity prices, and producers/service providers have ample pricing power to make up for the ‘lockdown loss’. In India, there is also significant wage inflation without a corresponding rise in productivity, especially among government employees/pensioners. The U.S. may be extending ‘free’ cash payout to almost all Americans during COVID disruptions, but in India, government jobs, being ‘permanent’ in nature, a significant number of government employees are getting substantial wage increases, which is aiding more inflation and pricing power in the hand of producers/service providers.

The government is the biggest spender and borrower. Also, a substantial percentage of government fiscal stimulus (infra projects, grants/subsidies) is being leaked at all levels, creating huge black/unaccounted money (corruption). These liquidity and devalued currency (imported inflation) are all supporting spiralling inflation, which is reducing discretionary spending power for lower-middle-class consumers.

Thus RBI has to tighten or keep a prudent monetary policy to balance inflation and growth. RBI has to manage inflation effectively; otherwise, bond yield will be bound to surge and government borrowing costs will be elevated. After the sudden closure of QE/GSAP buying in October, RBI may hike reverse repo rate in December monetary policy meeting and may also go for liftoff from H2CY22 in line with Fed to keep the interest rate/bond yield differential at an ideal level; otherwise who is going to invest in India growth story?

On Friday, the Indian market was boosted by exporters on higher . Nifty was boosted by techs/IT (hopes of favorable H1B visa policy by the U.S.), reality, energy (elevated oil prices/GRM), infra, FMCG, metals, MNC, private banks, automobiles, while dragged by PSU banks (higher bond yields) and media stocks. Nifty was supported by Infosys Ltd (NS:), HDFC (NS:), RIL (hopes of favorable SC judgment in Amazon-Future retail dispute/case), TCS (NS:), Tech Mahindra (NS:), ICICI Bank (NS:), Bharti Airtel (NS:), L&T (NS:), Bajaj Finance (NS:), Kotak Bank, Wipro (NS:) and Asian Paints Ltd. (NS:) (price hike).

Technically, whatever may be the narrative, Nifty Future now has to sustain over 18175-275 area for 18350-18475-18595 and 18675 areas; otherwise, it will fall to 18050-17875-17775-17675 and 17425 zones in the coming days. Similarly, Future now has to sustain above 39200-39500 zones for 40300-40700-41200 and 41800 areas; otherwise, it will fall to 38450-38370-37975-37375-37050-36940 and 36625 areas in the coming days.


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