Nifty may correct on higher for longer policy and regulatory tightening by RBI

Summary

RBI may ask private banks and SFBs to lower CD ratio below 75% while tightening screws on unsecured retail lending

On 8^th December, the focus of Dalal Street was on the RBI policy meeting (MPC) outcome. As highly expected, RBI holds all its key policy rates. RBI kept the benchmark policy repo rate at +6.50%, effective reverse repo rate (SDF) at +6.25%, MSF (Marginal Standing Facility), and Bank rate at +6.75%.

Although there were some expectations of a dovish hold this time; i.e. RBI/Governor Das may indicate the end of the present cycle of tightening and shift to a neutral stance, which may eventually transform into the next cycle of rate cuts (easing), which is natural for any central bank, if core inflation indeed slips drastically or even hovering towards targets, so that real rate of interest is kept at an appropriate restrictive levels.

But despite core CPI hovering around +4% targets for the last few months, RBI/Das preferred the continuity of the hawkish hold stance and higher for longer stance. RBI Governor Das categorically denied any thinking of a policy shift to easing or even neutral in the coming days despite a clear indication by the Fed to start easing by H2CY24. This may be because unlike global central banks (Fed/ECB), RBI does not provide any official forward guidance well in advance or indulge in random jawboning to control bond yields/financial market.

In any way, India’s total/headline CPI was around +5.55% in November (y/y), while the 6M rolling average was around +5.77%, the YTM average +5.72% and the 6M sequential average annualized run rate was around +8.00% amid surging food inflation. On the other side, India’s core CPI/core inflation was around +4.10% in November from around +6.10% in Jan’23.  The average core CPI is now around +5.0% in 2023 against +6.0% in 2022-21. The YTM average of India’s CPI is now around +5.7% in 2023 against +6.7% in 2022, +5.1% in 2021 and +6.6% in 2019 (pre-COVID).

Although RBI officially targets headline/total CPI, in reality, it’s now increasingly emphasizing core CPI data (in line with global central banks), although there is no official data/index about core CPI from India’s MOSPI, the government statistical agency. In this way, as per RBI’s projections and present trend, India’s core CPI may further fall to around +4.00% or even below that on average for 2024. Thus RBI may cut rates from April-June’24 by around 75-100 bps in FY25 (in line with the Fed) so that the core real repo rate would be around 1.75-1.50% in line with the present restrictive stance; at present RBI’s core real rate is around +1.50% considering average core CPI for 2023 around +5.0% and repo rate +6.50%.

Depending upon the inflation and GDP growth equation/mandate, RBI may prefer to maintain a 1.00-1.50% core real rate in the coming days. In 2025 (FY26), if India’s core CPI further falls to around +3.0% on average, then RBI may cut further by around another 100 bps for a repo rate +4.50%, which would be longer run terminal rate against the Fed’s +2.50%.

On 8^th December, India’s Central Bank RBI held its benchmark policy repo at 6.5% for the 5^th consecutive meeting to ensure inflation (CPI) further eased towards +4.0 targets, while supporting GDP growth. Although, India's annual inflation (CPI) slowed to a four-month low of 4.87% in October due to a slowdown in housing and clothing & footwear prices, RBI Governor Das warned about the possibility of accelerating inflation in November and December due to food price pressures, which came true later as in November, CPI jumped +0.54% sequentially to +5.55% annual reading. At this trend of soaring food prices, India’s total CPI may again surge at least +0.35% in December for an annual reading of +6.36%, above RBI’s upper tolerance range.

Wall Street Futures surged on hopes of a Fed pivot after softer-than-expected real GDP growths, and core PCE inflation which may prompt the Fed for an early rate cut by March 24. At present, the market may be assuming a total of 6 rate cuts, cumulatively -150 bps (6 rate cuts @-25 bps each from Mar’24) against the Fed’s dot-plot projections of -75 bps (3 rate cuts @-25 bps each). Thus Santa Rally is getting an additional boost.

Overall, Wall Street Futures soared to a record high led by Dow (38070) and Nasdaq Future (17165). In 2023 (till 28^th December), Dow Jones surged around +13%, S&P-500 gained +25%, while Nasdaq-100 soared almost +55% led by techs amid increasing AI optimism; techs such as Apple, Alphabet, Microsoft, Meta, Nvidia, and Tesla are expected to deliver +22% EPS growths in 2024, more than doubling S&P-500.

India’s benchmark stock index Nifty also jumped over +8.00% in December (till 28^th) and Nifty 50 Future (January) scaled almost 22K amid positive cues from Wall Street on hopes of a Fed pivot. India’s Dalal Street was also boosted by hopes & hopes of an RBI pivot. Nifty was also boosted by India’s political & policy stability, and the attraction of Modinomics and 6D (demand, development, demography, deregulation, digitalization, and democracy). Also, the recent fall in global oil prices from around $95 (September high after the start of the Gaza war) to almost $68 helped the Indian stock market (higher refinery margin/spreads for RIL, ONGC, and various OMCs).

India’s policy, macro, and currency stability is a rare case among comparable EMs (except China) and thus India enjoys a scarcity premium; FPIs are scrambling to buy quality Indian blue chip companies, that have good earnings growths, sustainable profitable business models, excellent corporate governance, impeccable management, and deleveraged balance sheet. Also, higher USDINR is good for export-heavy Nifty as almost 60% of earnings comes from exports led by RIL, INFY, TCS, etc.

Also, India’s banks & financials have enjoyed good/robust NIM/NII due to elevated bond yields and various government/regulatory policies. Thus FPIs/DIIs/Angel Investors/HNIs/Retailers are all flocking to the Indian stock market, especially when it is almost certain that PM Modi/ruling BJP will win the mid-2024 general election convincingly.

Although India’s nominal GDP may be now around $3.50T, at the 5^th largest position in the world, in terms of nominal GDP/Capita, India may be now still at the lowest in G20 simply because of its huge population. As per the UN estimate, India is now approaching a huge population of almost 1.50B by 2030, surpassing even China. India's population is expected to continue to increase until 2064 when it will peak at 1.7B. India's population is expected to grow by 15.5 million people each year. By 2030, India will have 1.04B people of working age (favorable demography, but needs quality employment).

It’s also a fact that due to the huge and growing population amid no official population control policy/effort for decades after decades, demand is always far above supply in India, resulting in both high inflation and high growth. Thus to cope with rapidly higher demand, the Indian economy has to grow at least +8.00% in real terms (if not at a double digit of +10.00%) to ensure higher supply, so that it can balance with elevated demand, resulting in price stability and quality employment.

India has to also create/produce foods in adequate quantities to ensure food price stability for the general public and thus needs higher productivity in the agriculture/farm sector through modern technology/marketing strategy. India also needs a quantum jump in public transportation infra, especially in railways (both normal/slow and high-speed railways) and also social infra like quality hospitals and schools to cater to its huge population.

Despite there being a huge difference/gap between India and China (democracy & autocracy), India needs to compete/follow the Chinese model in public infra (traditional/transportation/social) and agriculture with a feasible PPP model. India’s Modi admin is now trying to compete/copy some of the feasible China models in the creation of modern infra (both transport and social), manufacturing, and other sectors, so that by 2047; i.e. 100 years from 1947 independence from British Rule, India may be called as a developed nation, not developing.

India now has robust and improved tax collection due to higher rates of GST (sales tax), fuel tax, personal and corporate/business tax coupled with improved collection/compliance system. Thus India is employing huge fiscal stimulus in creating infra, which is boosting GDP around 3 times, even after targeted social security grants (dole money), which is boosting GDP by 0.95 times (indirect boost to consumer spending).

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (21942) now has to sustain over 22100-22200 for a further rally to 22450/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 22050/22000, may fall to 21700/21600-21475/21300, further 21125/20850-20725/20575-20350. And sustaining below 20350, Nifty Future may again fall to 20150/20000-19900/19650 and 19400/19150-18850/18700 in the coming days.

Conclusions:

Looking ahead, Fed may signal no early rate cuts from Mar’24; Fed may go for rate cuts every -25 bps in Q2-Q3-Q4CY23; i.e. June-September and December’24 for a cumulative -75 bps rate cuts. Similarly, India’s RBI may also refrain from any rate cuts till at least Aug’24; i.e. the formation of a new Federal government under PM Modi. RBI may also opt for -75 bps rate cuts in FY25 (Oct’24, Dec’24, and Feb’25). All these should be negative for the stock market, which already jumped to a lifetime high in anticipation of an early Fed rate cut from Mar’24. For Nifty, apart from the hawkish hold strategy by RBI, increasing regulatory pressure on banks & financials by RBI may also prompt some healthy correction.