Nifty slips last week as FPIs, banks, techs and RIL dragged

The Feb’24 interim budget (vote on account) may be a visionary document for the next five years without any major fiscal stimulus/policy decision

India’s benchmark stock index Nifty closed around 21352.60 Thursday, stumbled almost --0.47 % ahead of the long weekend (Republic Day holiday) on subdued cues from tech-heavy Nasdaq Future amid subdued guidance by Tesla and Intel. Banks & financials are also dragging India’s Dalal Street amid increasing funding costs, RBI pressure on lowering CDR, limited hike in lending rates and subsequent pressure on NIM (net interest margin). Indian savers/HNIs are now not so much interested in depositing large amounts of savings (apart from regular & emergency funds) with banks as the vibrant stock/MF market is providing much higher returns with adequate liquidity.

Also growing selling by FPIs amid regulatory tightening by SEBI dragged the market. As per reports, SEBI may impose tightened ultimate beneficial ownership (UBO) norms for FPIs, from 1^st February despite pressure from foreign banks and a section of offshore fund managers to ease the rules ahead of the deadline. As per an estimate, there could be a sell-off in Indian stocks in the range of Rs 1.50-2.00T over the next six months by FPI/funds unable to comply with the norms. This is related to the Minimum Public Shareholding (MPS) requirement and a politically sensitive issue involving the Adani group and a recent SC directive.

On Thursday, Nifty was dragged by HDFC Bank (subdued report card and FPIs exit issue; but LICI will hike stake to 9.99%); Bharti Airtel (advance payment of around Rs.0.08T to clear 2015 spectrum dues), ITC, Tech Mahindra (subdued report card), Axis Bank (subdued guidance-rising funding cost, moderation in CDR and NIM), TCS, Kotak Bank (rising cost of fund and falling NIM), HCL Tech, Cipla (management rejig and potential stake sale) and Infy (weak Nasdaq ques). Nifty was supported by ICICI Bank (comparatively better position in NIM), RIL, Bajaj Auto (upbeat business update), NTPC, Adani Ports, Coal India, Indusind Bank, Bajaj Finance, M&M, and L&T.

Overall on Thursday, the Indian market was dragged by techs, pharma, FMCG, and banks & financials, while supported by energy (lower oil positive for OMCs), realty, media, metals, selected PSU banks, For the week, Nifty stumbled around -1.02%, dragged by almost all the sectors except Pharma.

India Private Sector Economic Activity Growth Accelerates in January:

On Wednesday (24^th January), the S&P Global/HSBC flash data showed India’s Manufacturing PMI rose to 56.9 in January from 54.9 sequentially, and the strongest monthly growth in the private manufacturing/factory sector. New orders rose faster, with external orders also increasing, while job levels were broadly unchanged. Meanwhile, manufacturers noted a mild rise in purchasing prices in January that was broadly similar to those seen in November and December and therefore remained well below its long-run average. Finally, manufacturers became more optimistic about the outlook, with the level of positive sentiment hitting its highest in nearly 9 -1/2 years.

On Wednesday (24^th January), the S&P Global/HSBC flash data also showed India’s Services PMI rose to 61.2 in January from 59.0 sequentially, pointing to the strongest growth in the private services sector in six months. New orders rose at a faster pace and employment also went up. On the price front, service providers observed the fastest increase in operating expenses since August 2023, amid higher food (chicken, eggs, rice and vegetables), vehicle parts, construction material, freight and labor costs. According to panelists, additional overtime payments were made to employees due to robust demand. Finally, service providers also became more optimistic about the outlook

Finally, the S&P Global/HSBC flash data also shows India’s composite PMI rose to 61.0 in January, up from 58.5 sequentially, pointing to the sharpest rate of growth in the country's private sector economic activities since Sep’23, with both the services and manufacturing sectors expanding at a faster pace. Inflows of new orders rose the most in six months, and export sales increased the most since last October. Additionally, both employment levels continued to rise, and outstanding business volumes advanced the most in nearly a year and a half. On the price front, input cost inflation accelerated to a five-month high, while the rate of charge inflation softened to a ten-month low. Finally, business confidence rose to its second-highest level in over a year.

Comments by S&P Global/HSBC on India’s Composite PMI for Jan’24:

“The economy grew at a faster pace in January, led by stronger manufacturing output, as well as more robust business services activity. New orders rose at a faster pace than a month ago, and within that, international orders were stronger than before. Input prices rose quickly, but output prices were raised to a smaller extent.”

Overall, S&P Global/HSBC PMI data shows robust private sector economic activities in January after some easing in December. In India, the winter holiday period starts from the 3^rd week of December till the 1^st week of January (school/college) and also beyond that (various holidays) - till at least February-March. Thus India’s service PMI is usually robust led by travel & tourism. Also after Festival season and Independence Day stock clearing sales, Indian manufacturing activities again boosted up to fill ‘empty shelves’. Thus expect another robust quarter (Q4FY24) of economic activities. But S&P Global/HSBC also indicated a lack of pricing power; i.e. subdued operating margin as producers/service providers are not in a position to hike selling prices despite some uptick in raw material/input costs.

On Friday (12^th January), the MOSPI data showed India’s total CPI (inflation) edged higher to +5.69% in December (y/y) from +5.55% sequentially, below the market consensus of 5.90%, but the highest in four months. The headline inflation in December was led by food inflation rising to 9.5% from 8.7% as monsoon rainfall in India hit a five-year low in 2023 due to El Nino, affecting agricultural production. Also, poor road/railway infra and logistical delays are affecting supplies, while demand always remains elevated due to the huge population, frequent festivals, and rising income of the middle class. Also, huge fiscal stimulus through various government infra CAPEX and social security schemes (direct/indirect grants) are helping the generation of huge corruption/black/unaccounted money, causing both higher consumer spending and inflation.

In December, prices rose the most for vegetables (27.6%), pulses (20.7%), spices (19.7%), and fruits (11.1%) but fell for oils and fats (-15%). On the other hand, a slowdown was seen in prices for pan, tobacco, and intoxicants (3.7% vs. 3.8%), clothing and footwear (3.6% vs. 3.9%), and miscellaneous (4.1% vs. 4.4%). Additionally, housing inflation was steady at 3.6% and prices for fuel and light costs fell by 1% after a 0.8% drop in November.

India’s total CPI sequentially (m/m) decreased to -0.30% in December from the November reading of +0.54% and below the market consensus of -0.15%. The fall in December CPI sequentially was in line with the long-term trend due to lower prices of vegetables in the winter season.

India’s annual (y/y) core CPI (core inflation) further eased to +3.90% in December from +4.10% sequentially and lower than the market consensus of +4.00%. 

Overall, India’s total CPI average was around +5.7% in CY23 against +6.7% in CY22, while the average sequential CPI rate remains around +0.47% in the last 3-years (2021-23) against 2020 average rate +0.38% and 2019 rate +0.68%. In brief, India’s sequential CPI remains around +0.50%, equivalent to an annualized rate of around +6.0%, RBI’s upper tolerance band. Although, officially RBI targets headline/total CPI, in reality, RBI is now also talking more/following core CPI in line with the Fed and other major global central banks. In 2023, the average core CPI was around +5.0% against +6.0% in 2022 and 2021. The 6M rolling average of core CPI was around +4.4% in Dec’23.

As per Taylor’s rule, for India:

Recommended policy repo/interest rate:

(I) = A+B+(C+D)*(E-B) =0.50+4+ (1.5+0)*(5.0-4.0) =0.50+4+1.5*1.0=0.50+4+1.5=6.00%

Here for RBI/India:

A=desired real interest rate=0.50; B= inflation target =4; C= permissible factor from deviation of inflation target=1.5 (6/4); D= permissible factor from deviation of output target from potential=0; E= average core CPI=5% (for 2023)

Thus assuming the estimated average core inflation is around +5.00% in CY23, the restrictive target of the RBI repo rate may be around +6.00%. India’s real rate was around +1.25% in Feb’19 if we consider the then repo rate of +6.50% and core CPI +5.25%. Now around +5.00% average core CPI and +6.50% RBI repo rate, the real repo rate is around +1.50%, consistent with RBI’s restrictive preference of 1.50% (1.00-2.00%).

India’s sequential CPI rate has been quite elevated for the last few years even before COVID due to higher population, higher fiscal stimulus/higher black money, higher demand, and various supply disruptions from local weather, logistics, and geopolitics. Simply put, the present supply capacity of the economy is quite lower than the growing demand. The average sequential CPI rate is now almost +0.50% for the last 5 years. In 2023, even after RBI hikes, the YTD average rate of sequential CPI rate was around +0.43%. If the average sequential CPI rate falls further to around +0.38% in 2024 and +0.26% in 2025, the average headline CPI should be around +4.4% and +3.8%; i.e. at target on a sustainable basis by CY25 or FY26.

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% on average for 2024. Thus RBI may cut rates from Aug’24 by around 75-100 bps through Feb/Mar’24 (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 of +4.50%, which would be a longer run terminal rate against the Fed’s +2.50%.

RBI may start to cut from Aug’24, if Fed starts the same from July’24:

If US core CPI indeed dips below +3.0% by May-June’24 and if it seems that the 2024 average core inflation will be around +3.2%, then the Fed may start cutting rates from July’24 and may cut cumulatively 75 bps at -0.25% pace till Dec’24 for a repo rate at 4.75%, so that core real rate continues to stand around +1.50%, in line with the present restrictive stance (5.50% repo rate-4.00% average core CPI for last 6M).

Although RBI is still not indicating any rate cuts in the coming months in line with its hawkish hold stance (higher for longer) and not issuing any official forward guidance, in reality, RBI is bound to follow the Fed’s actual policy action to maintain present policy parity and real bond yield differential. Thus RBI may start cutting rates from Aug’24 (after the June’24 general election) for cumulative cuts of -75 bps in 2024 (in line with the Fed, everything being equal to maintain policy parity and imported inflation as USD is the global reserve currency).

India’s general election may be announced by the EC in mid-March (similar to the 2019 schedule), with the start of the actual voting from mid-April to late May and the formation of the next government (led by Modi/BJP) in early June and the presentation of a full-fledged Federal budget early July (after a vote on account budget in February). Thus RBI will have a complete idea of the Government’s fiscal stimulus programmes and the requirement of debts to fund budget/fiscal deficit.

Accordingly, RBI may officially indicate the end of the present tightening cycle in the February meeting and shift to neutral mode (ahead of the announcement of the election schedule by the EC and the imposition of model conduct of code). RBI may further hold rates in April and June with a dovish hold stance with a clear indication of rate cuts from Aug’24 (if India’s core CPI dips well below +4.0% by then). RBI may cut -25 bps each in August, October, and December for a cumulative rate cut of -75 bps in CY2024 for a repo rate of +5.75% against the Fed’s +4.75% (after similar -75 bps rate cuts).

RBI may use the total/headline CPI and core CPI data at its convenience officially to justify rate cuts. At present, RBI is quite optimistic about India’s growth potential, while cautious about still elevated inflation. Similarly, Modi admin is also quite concerned about India’s elevated inflation and high cost of living and thus may focus on price stability rather than economic growth ahead of the 2024 general election.

Technical trading levels: Nifty Future

Whatever the narrative, technically Nifty Future (21351) now has to sustain over 21700 for a further rally to 21800*/22100-22200/22300* and further 22450-22550*/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 21650/600-550/500, may again fall to 21400/21300-21240/21075, and further 20950/20890*-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.

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