Nifty stumbled on the concern of political stability and MF stress tests

Summary

The market is concerned about names/images of electoral/political donors including not only big private corporations but also their PSU peers

India’s benchmark stock index Nifty closed around 21997.70 Wednesday, slumped --1.51 % on the concern of political & policy stability and SEBI regulatory tightening on small /mid-cap MFs after Indian capital markets regulator SEBI advised mutual funds (MFs) to protect investor interest by limiting flows, rebalancing portfolios, and other measures in the last week of February. India’s MF body AMFI has recommended that among other things, mutual funds should moderate inflows into these schemes and also rebalance the portfolio. The market may be worried that MFs will try to increase the cash in their portfolio and this could lead to more selling in the coming days. Apart from MF stress tests, SEBI is also concerned about the non-stop rally of Dalal Street and elevated/frothy valuation.

The market was also concerned about any potential escalation of geopolitical tension between India and China after some comments made by Indian Foreign Minister Jaishankar Tuesday evening in a conclave (Indian Express). Jaishankar said in a candid interview/normal conversation that India-China relations are still not normal at the LAC: “With an estimated 50,000-60,000 troops posted on either side of the India-China border in eastern Ladakh for almost four years now, the situation is very tense and dangerous and it’s in the common interest of both countries to not have that many forces on the Line of Actual Control (LAC)”.

On Wednesday Nifty was also dragged by issues over political donations through SBI/election bond, in which the SC has directed SBI to furnish all details of political bonds/donors and also beneficiary political parties. Although SBI sought almost 4-months till June’24 (i.e. after the election), SC trashed it and forced SBI to furnish all the election bond details available so far to the SC/EC by 13^th March, asking EC to make the data available in public domain by 15^th March.

Although the SBI may have furnished electoral bond details in two separate tables without clearly divulging which business house pays how much to which political party; i.e. without matching/reconciliation, it may not be very tough for data analytics/AI to have a broad idea about which party got how much from specific business house/personal donors.

Although the SC directive on political donation through anonymous bonds is an issue for BJP, being the largest beneficiary followed by INC and TMC, eventually it may not affect BJP’s poll prospects this time as all know about the identities of big business houses in India, donating to BJP and other parties. In this way, the market is already aware that India's biggest corporate groups like Adani, Ambani (RIL), and also Tata have been the biggest political donors and influencers for a long time irrespective of BJP, INC, TMC, and even CPIM at Federal/state governments. But the country now needs political reform along with a transparent political donation process of big business houses and its impact on policies/economics.

The market is also concerned about the sudden resignation of one of the Deputy Election Commissioners just ahead of the election amid all these controversies about electoral bonds/political donations. Now a Committee comprising the PM, the Leader of the opposition in the Lok Sabha, and a Cabinet Minister (as per the new law substituting the CJI with a Cabinet Minister) is meeting on 14^th March to finalize the appointments of two Election Commissioners, lying vacant. But a petition has been filed in the SC (by the same activist group ADR fighting for transparency in electoral bonds), challenging the new law passed by the government overturning SC's judgment on the appointment of Election Commissioners.

Nifty surged to a new life time high on hopes of RBI pivot and Modinomics optimism

Nifty scaled around 22526.60 Monday (11^th March), at a new life time high on hopes of Fed/RBI rate cuts in H2CY24 and Modinomics optimism. Indian PM Modi is set to return with a bang for the next 5 years in the forthcoming May-June general election with an even higher majority. Although the general election date is still not announced, going by the present political narrative/scenario, and the lack of any credible face of opposition leader who can challenge Modi at all-India levels (despite hard work/walk by INC’s Rahul Gandhi), it’s almost certain that BJP is going to get 300+ LS seats this time, if not 370-400, the party is targeting this time.

Although India’s nominal GDP may be now around $3.55T, at the 5^th largest position in the world, in terms of nominal GDP/Capita, India may be now still at the lowest in G20 simply because of its huge population. In terms of real GDP ($), India is now the world’s 6^th largest economy, but far away from China’s $17.51T and the US's $20.18T simply for huge currency devaluation over the last few decades.

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).

In his recent media interactions, PM Modi already hinted at big policy reform in his 3^rd term aiming for India to become a developed economy by 2047, boosting quality employment ensuring price stability and social safety (quality education and healthcare by government-free for all). The market was expecting the Modi admin may bring some structural reform aiming at quality employment generation and population control in the next term (targeted poor/middle-class people having more than 2 children may not be eligible for any government subsidy/scheme/job like in China). But sudden implementation of CAA just a few days before the announcement of the election may be a policy blunder for the Modi admin as a result of increasing arrogance and overconfidence.

Modi admin/BJP is now on the back foot for the fear of completely losing the Muslim minority vote bank in Muslim-populated states including Southern, WB, Bihar, and even UP/Delhi. The sudden decision to implement CAA may be wrong as it will not change any ground reality of legal/illegal migrants in the country, living with valid citizenship for the last few decades, but may mislead the Muslim minority community, thanks to intense political propaganda by various opposition parties under INDIA coalition. Still, there is no visible sign of any credible & politically mature national leader, with an all India both level strong cadre-based organization (including INC/Rahul Gandhi) to challenge BJP/Modi’s political leadership at all Indian levels with a pro-development, anti-corruption, and Hindutva platform along with targeted social security narrative.

In this way, this time BJP/Modi is so confident about retaining/gaining an absolute 2/3^rd majority in LS (around 365 seats). But for this, BJP has to win more seats in WB and some southern states, which looks tough at this stage, considering the polarization of Muslim votes, which got more complicated after the implementation of the CAA (Citizenships Amendment Act) Monday (11^th February), just a few days ahead of an expected announcement about election schedule by the EC. Thus BJP may not get a 2/3^rd majority in the LS of its own this time despite the deluge of development/infra projects launching ceremony across India worth more than Rs.11T, equivalent to the FY25 budget proposal.

Modi has to win the trust of millions of Muslims in India by a commitment to build the Babri Masjid in Ayodhya with the same scale/enthusiasm as Ram Mandir (in line with SC directive). But even with 300+ LS seats along with the support of other likeminded political parties (NDA) directly/indirectly, the Modi admin should have no issue in launching the next generation of structural reforms to improve the country’s productivity and make India a developed economy from developing and 3^rd largest economy in the world, comparable to the most populous neighbor China.

India’s real GDP has to grow in double digits at least +10% CAGR in USD terms in the next 25 years, so that real GDP may grow to around $8-10T by 2050 from the present $2.09T. The supply/infra capacity of the Indian economy has to grow on multiple scales to serve the increasing demand of a growing and more prosperous middle-class population. The huge infra (traditional, transport and social) and fiscal stimulus will also ensure quality employment in India to ensure millions of educated youths/middle-aged people get a decent/good job.

Talking about GDP, on 29^th February, the MOSPI flash data shows India’s real GDP for Q3FY24 was around Rs.43.72T against 41.86T sequentially (+4.44%) and 40.35T yearly (+8.35%); i.e. the Indian economy has expanded by around +8.4% (y/y) in Q3FY24, against 8.1% in Q2FY24. Although some sections of the market were expecting +6.6% annual growth in Q3FY24, the rate was already known by back-calculation when (5^th Jan’24) the MOSPI published the advance estimate of real GDP for FY24 at around Rs.171.79T, which is now revised higher at Rs.172.90T against Rs. 160.71T. Accordingly, now Q4FY24 real GDP should come to around Rs.46.41T; i.e. a sequential growth of +6.15% and annual growth of +6.40%. But as a par trend, the Q4FY24 real GDP may also come around Rs.45.14T, a little lower.

On the expenditure approach of real GDP calculation, private consumption rose at a faster 3.5% (vs 2.4% in Q2) and private investment/CAPEX growth remained robust although it slowed (10.6% vs 11.6%). Both exports (3.4% vs 5.3%) and imports (8.3% vs 11.9%) rose at a slower pace and public expenditure (government spending) contracted 3.2% after soaring 13.8% in Q2. Meanwhile, the estimate for the FY24 real GDP growth rate was revised higher to 7.6% from 7.3%.

The Q3FY24 real GVA was around Rs.39.85T against 38.42T sequentially (+3.87%) and 37.42T (+6.49%). On the production side, faster increases were recorded for services (6.7% vs 4.5%), finance & real estate (7% vs 6.2%). Also, the manufacturing sector continued to grow at a double-digit pace (11.6% vs 14.4%) and production of utilities (9% vs 10.5%) and construction (9.5% vs 13.5%) remained robust. On the other hand, the farm sector contracted 0.8% (vs +1.6%) amid adverse weather conditions and the El Nino effect.

Note:

·         GDP (Production/Income Approach) = GVA at Basic Price + Net Taxes on Products

·         Following Expenditure Approach, GDP = PFCE + GFCE + GFCF + CIS + Valuable + Export - Import.

·         Discrepancy refers to the gap between GDP (Production/Income Approach) and GDP (Expenditure Approach)

Overall, India’s real GDP is estimated to reach around $2.09T by FY24 from around $1.72T in FY15 under NDA/BJP/PM Modi at an average growth rate of around +2.15% (real GDP at FY12 constant prices and relevant yearly average USDINR exchange rate). Similarly, India’s nominal GDP is estimated to reach around $3.55T in FY24 from around $2.03T in FY15 at an average run rate of around +7.5%.

In the last ten years, USDINR jumped almost +36%, while headline CPI surged almost +55%. India’s GDP deflator also surged almost +51% in the last ten years, resulting in a huge anomaly/difference between nominal and real GDP. Economists are concerned only with real GDP, not inflationary/inflated nominal GDP. In advanced economies (AEs), like the US, EU, and China the difference between real and nominal GDP is moderate/small due to lower inflation/GDP deflator.

On Tuesday (12^th March), government (MOSPI) data shows India’s annual (y/y) retail/total CPI (inflation) was almost unchanged at around +5.09% in Feb’24 from +5.10% sequentially and slightly above market consensus of +5.02%. On a sequential (m/m) basis, India’s headline CPI increased around 0.16% in Feb’24 after -0.11% contraction in Jan’24 (due to seasonal factors).

In Feb’24, India's total CPI was boosted by Food inflation, at 8.66%, slightly higher than 8.3% in January, mainly due to higher prices for vegetables (30.3% vs 27%), while cost slowed for pulses (18.9% vs 19.5%), spices (13.5% vs 16.4%) and fruits (4.8% vs 8.7%) and continued to fall for oils and fats (-14% vs -15%). A slowdown was also seen in prices for pan, tobacco, and intoxicants (3.1% vs 3.3%), clothing and footwear (3.1% vs. 3.4%), miscellaneous (3.6% vs. 3.8%) and housing (2.9% vs 3.2%) while prices for fuel and light fell by 0.8% after a 0.6% drop.

India has also a comfortable BOP (Balance of Payment) position despite a consistent trade deficit in merchandise export as service export is quite robust coupled with increasing remittances from ever-growing NRIs. India’s negligible external debt (in FX/USD) is a great advantage for the country’s macro/currency stability, unlike many other EMs, despite running a huge merchandise trade deficit led by oil, gold, and some other commodities. Overall, Nifty is consolidating around life time high levels of 22000 ahead of the general election, in which PM Modi is set to return with a blockbuster margin (300+ LS seats??) for the next 5 years, ensuring political and policy stability/continuity.

Overall, the 6M rolling average of total CPI is now around +5.2% against the 2023 average of +5.7%, still substantially above the RBI target of +4.0%.

On Tuesday, unofficial estimates from the MOSPI data showed India’s annual (y/y) core CPI further eased to +3.37% in February from +3.59% sequentially, lower than the market median consensus of +5.12% and lowest since Nov’19 (pre-COVID days).

Overall, the 6M rolling average of India’s core CPI is now around +4.0%, against the 2023 average of around +5.0% and the 2022 average of around +6.0%. India’s average core CPI rate was around +5.8% for the 2012-23 period. Although RBI is still on a hawkish hold stance as the headline CPI of 4% is the official target, RBI is now increasingly talking about the disinflation process in core CPI, the 6M rolling average of which is now around +4.0% targets. Looking ahead, RBI may officially shift to a dovish hold/neutral mode in the April-June meeting from the existing hawkish hold/removal of accommodation/restrictive mode and begin cutting rates by 75-100 bps from Aug’24 till Feb’25 (in line with Fed and pro-growth narrative of Modi-III).

Market wrap:

Nifty lost over 2% in the last 7-days despite Modinomics optimism

·         The market is concerned about frothy valuation and an imminent correction, especially for selected large caps and many small/midcaps, corrected almost -10% and -5% in the last 30 days amid SEBI regulatory tightening and stress tests

·         The concern of political and policy stability as a result of electoral bond and CAA issues

·         The concern of India-China geopolitical tensions after some comments by India’s Foreign/External Affairs minister Jaishankar (but these comments are nothing new no real concern)

·         The market is concerned about names of corporate donors to political parties and their image as these companies may be given undue favor by the government of the day for their funding (donations)

For the last 7-days, Nifty was dragged by RIL, SBIN, NTPC, POWERGRID, Axis Bank, LT, Coal India, ONGC, M&M, Tata Motors, ICICI Bank, Adani Enterprises, Adani Ports, HUL, Titan, Bharti Airtel, Tata Steel, Sun Pharma, Kotak Bank and BPCL, while boosted by ITC (stake buy by Singapore GIC and various FIIs/DIIs, which was sold by BAT), HDFC Bank ( analyst upgrade after steep correction), and TCS. The market is concerned about political donations made by not only private corporations but also PSU ones, which may badly damage the ‘clean’ image of the BJP if come true. Overall, the Indian market was dragged by realty, media, energy, metals, automobiles, pharma, banks & financials, FMCG and IT/techs.

Technical trading levels: Nifty Future

Whatever may be the narrative, technically Nifty Future (22076) now has to sustain over 21980 for any recovery towards 22200/22320-22400/22500 and 22650 and further sustaining above 22700, may scale 22850/23025 and 23260-23575-23700 levels in the coming days/weeks; otherwise sustaining below 21950/21840, Nifty Future may further fall to 21500/21325*-21130/20850, and further 20630/20460-20280/19730 and 19400 levels in the coming days.