India’s Bank Nifty closed around 38370.40 Friday; slumped almost -1% in the last two trading days. Broader market Nifty closed around 18234.80, just -1.9% down from the lifetime high (LTH) 18604.45 scaled in Oct’21. But Bank Nifty is still around 9% down from Oct’21 LTH 41829.60. Nifty corrected around -11.79% from Oct’21 LTH to Dec’21 low 16410.20, while Bank Nifty corrected almost -18.67% in the same period to make a low 34018.45. In brief, Bank Nifty is underperforming broader market Nifty, which gained around +24.12% in 2021 against +13.49% for Bank Nifty in the same period.
In Bank Nifty, only SBI (NS: SBI ), ICICI Bank (NS: ICBK ), AU Small Finance Bank, and Federal bank outperformed Nifty, while RBL Bank, Bandhan Bank, Indusind Bank, IDFC (NS: IDFC ) First Bank, Kotak Bank, HDFC Bank (NS: HDBK ), Axis Bank (NS: AXBK ) and PNB (NS: PNBK ) underperformed for various reasons including expensive valuation metrics, corporate governance, NPA management issues, COVID stress on retail and MSME loans and RBI ‘policy error’ like failure to increase of official reverse repo rate. But the primary reason may be the market is expecting muted NIM (net interest margin) amid elevated bond yield.
Despite RBI repo rate +4.00%, India’s bond yield is consistently above +6.00% and in Jan’22, it made a high around +6.60%, while the average for 2021 was around +6.25% amid sticky core inflation around +6.00%, headline inflation +5.5% and 1Y inflation expectations around +11% on an average. India’s top-rated corporate bond yield is around +8.3%; i.e. almost +3% higher than government bond yield. In this scenario, apart from the home loan (around 7.55% on an average) and car loan (around 9.65% on an average), almost all other households/personal loans as-well-as business loans have lending interest well over double digits (around +11.50% on an average).
Indian Bank’s effective market-driven reverse repo rate is now around +3.75% against the official reverse repo rate +3.35% amid a deluge of RBI reverse repo operations. Thus banks are enjoying higher risk-free market returns for their excess funds and are also not in a hurry to extend indiscriminate lending amid COVID disruption. Lingering COVID disruptions/restrictions/lockdowns are also affecting the collection (loan EMI) efficiency/mechanism of Banks and thus they are focusing on the return of capital (safety) rather than return on capital (risk).
Moreover, due to automobile chip shortages and production disruptions, the auto loan portfolio, which is under secured lending is also hampered. Indian domestic automobile sales declined in FY21. And it may take significant time for domestic car sales to recover to pre-COVID levels.
Also, banks/NBFCs have now turned extremely cautious on unsecured personal loans and lending for consumer durable goods after COVID disruption. Thus apart from home loans (secured lending), banks are now reluctant to extend credit under personal and business/MSME loans. And big corporates are now increasingly turning towards capital markets(including bond issuance) for their capital requirement. The overall loan growth by banks is now hovering around 6.5%, in line with India’s potential GDP growth in the coming days and off the 2017s low of 4%, but also still way below 2019 levels of 15%, which was unsustainable. In brief, there is no lack of liquidity in the banking system, but as usual, there is a lack of quality & eligible borrowers even at lower borrowing costs.
And Indian banks are now quite cautious with irresponsible & indiscriminate lending. Private as-well-as PSU banks are now lending prudently and also emphasizing the return of capital rather than return on capital. As a result, banks are now parking a record amount of excess funds in RBI reverse repo window to earn a risk-free decent return then to lend to a potentially bad borrower for possible default in the coming days. During, COVID pandemic days, there is over a 25% increase in retail/household and SME loans. The RBI is now quite concerned about growing/brewing retail NPA/NPL (fresh stressed assets) in the banking system, especially for stressed households and MSMEs.
Now talking about inflation, the Ministry of Statistics and Programme Implementation (MOSPI) data shows India's headline inflation (CPI) rose to +5.59% in December (y/y) from +4.91% in the previous month, but below market expectations of +5.80%, the highest in the last 5 months (since July’21). The headline CPI was sequentially (m/m) dropped -0.36% in December, the first decline in 11-months against the November rise of +0.73%. In December’21 too, there is a sequential decline of CPI by -1.01%.
In December every year, the CPI is usually dragged by mainly food/vegetable inflation (winter seasonal factor). India’s core CPI rose around +6.00% in December (y/y), almost flat from the November reading. Yearly, CPI rose at a faster pace for food, clothing, and footwear, while inflation slowed for fuel and light, housing, pan, tobacco and intoxicants, and miscellaneous items. India’s CPI and core CPI are both consistently above RBI target +4.0%.
On Friday, India’s Office of the Economic Advisor data shows the annual wholesale price inflation (WPI) rate in India inched down to +13.56% in December (y/y) in line with expectations from +14.23% in November (which was the highest in more than a decade). India’s WPI, equivalent to PPI slowed in December for fuel and power, manufactured products, and basic metals. But WPI accelerated for primary articles, with prices of food articles jumping sharply. Monthly, WPI was down -0.35% in December, reversing from a +2.73% rise in November.
India’s headline CPI and core CPI were around +5.13% and +5.92% in 2021 on average, while in Dec’21 was +5.59% and +6.00% respectively. The Indian unemployment rate was 7.9% in Dec’21 (as per CMIE data) against Nov’21 figure 7.00% and Dec’20 print +9.1%. In FY19, the average unemployment rate was 6.3% and in FY18, the figure was 4.7%. With an average unemployment rate of 7%, core inflation around 6% and real GDP still running around pre-COVID levels, the Indian economy may be still under stagflation despite RBI's effort to stimulate above-trend/potential growth by keeping interest rate lower and compromising on the inflation front.
Looking ahead, as the gap between WPI and CPI is increasing, if producers can’t increase their prices, it will hurt their margin. Thus retail prices may increase more unless there is a sudden drastic fall in input costs. Also, Omicron/COVID-related global/local supply chain disruptions elevated global oil and other commodity prices along with higher telecom tariffs and likely elevated GST on several goods & services in the coming days; inflation is expected to be elevated. This will cause a further uptick in bond yield even if RBI does not hike.
Higher inflation is a result of higher demand and lower supply; i.e. demand-supply mismatch. Although, as a central bank, RBI has tools to control demand, it can’t control supply issues. Thus, RBI has to reduce excess liquidity in the system to control demand, while both federal and state governments have to ensure no supply bottlenecks and lower taxes on oil products, the main reason behind elevated inflation expectations. In India, there is also an issue of wage inflation; i.e. higher wages above productivity levels, especially for government and some private employees. This, along with devalued currency (higher imported inflation) resulting in sticky inflation.
Also, there is an issue of a steady flow of black money being generated through rampant corruption at all levels, especially bank loan frauds, government infra/fiscal stimulus and various grants. Thus RBI, like a Central Bank, has to control excess liquidity to control demand and inflation. RBI can’t ignore inflation going forward as it will damage its credibility and FIIs/FPIs will withdraw funds. Consistently higher/sticky inflation is always bad for the economy as it will hurt discretionary consumer spending of common people, overall economic growth, the standard of living and also may create incumbency wave for the ruling Federal political party; i.e. BJP/Modi admin. Higher inflation may cause political and policy instability going forward at the Federal level.
The combination of subdued growth in consumer spending and low capacity utilization is also causing low private Capex (business investment) and muted economic growth. India needs to ensure consistently higher real GDP growth above +8% levels for the next 10-years to ensure maximum quality employment and higher personal tax revenue to improve the fiscal math. Public asset selling/monetization is a temporary relief. Unless there is substantial growth in private CAPEX, there will be no growth in employment. Thus controlling inflation, stimulating consumer spending and private CAPEX are the need of the day for growth in quality employment.
RBI has to control inflation; i.e. give respect to its price stability mandate strictly. Now RBI is using 6% CPI as an inflation target instead of 4% for the sake of higher economic growth. But that policy seems not to work either. Thus it’s the collective responsibility of all policymakers (RBI, Federal and state governments) to ensure sustainable real economic growth +8% consistent with 4% price stability to generate quality employment for the public. USDINR may soon scale 80 levels before the 2024 general election, which will cause higher imported inflation, especially for oil.
Looking ahead, as Fed is now expected to hike rates quite aggressively from March/June’22 till at least early 2024 by nine times (+2.25%) for a Federal Fund rate (reverse repo) +2.50% along with QT, India’s RBI has to match Fed tightening proportionately to prevent outflow and further abrupt devaluation of INR (against USD). Thus, whatever may be the RBI rhetoric, RBI will also go for liftoff (gradual rate hikes) from April’22 onwards with a +0.25% hike in every bi-monthly policy meeting for a cumulative rate hike +2.25% in the next nine meetings. RBI has to keep a +6.25% repo rate against the Fed rate +2.50% to keep present interest/bond yield differential; otherwise, FPIs will invest in Biden’s ‘Build Back America’ rather than Modi’s ‘Atmanirbhar Bharat’ story.
As Fed is now providing a clear signal for successive rate hikes and QT in 2022, RBI also has to tighten to match Fed aggressiveness. Thus RBI may hike reverse repo rate to +3.75% from present +3.35% in forthcoming February policy meet and then depending on actual Fed tightening action, RBI may also go for 3-4 hikes in 2022-23 each, most probably starting from April’22 onwards. By then, state elections and FY23 budget exercise will be over. RBI will have a fair estimate of likely government borrowing for FY23 and as a debt manager of government, RBI will try to ensure the lowest borrowing costs/bond yields for the government also. For all these, inflation control is most important irrespective of RBI rates.
Despite comparable current inflation rate (real), bond yields are much lower in the AEs (US-Europe) than Des (like India) because long-term inflation expectations are still hovering around +2% in the AEs unlike in India, where it’s around +12%. The market is confident that once COVID is over, supply chain disruptions in China and other Asian exporters will be resolved, which will eventually make inflation in line again in the AEs. But that’s not the case in DE like India.
The market is now expecting successive RBI hikes (tightening) in FY23 to match similar Fed tightening, everything being equal. Thus Bank Nifty is under stress coupled with various other COVID-related issues. SBI is already hiking its base rate as bond yields are going higher irrespective of RBI policy/rate action. Higher rates will affect banks’ credit growth, although it may be positive for NIM as Indian banks have generally adequate pricing power, it may also cause higher NPA. The deluge of legacy NPA in India today is the result of decades of higher interest rates (due to higher inflation). Thus inflation management is of utmost priority for a central bank and RBI has to act; otherwise, its credibility will be at stake.
Technically, whatever may be the narrative, Bank Nifty Future now has to sustain above 39000-39200 levels for a further rally towards 40300 and 41825 (LTH); otherwise, it may correct and sustain below 37900, may again fall towards 34150 levels in the coming days. Similarly, Nifty Future now has to sustain over 18305-18405 levels for 18600 (LTH); otherwise, expect some healthy corrections (consolidations) towards 16800-400 levels again in the coming days. Lingering Omicron/COVID disruptions, Fed/RBI tightening and budget disappointments may be some of the triggers apart from subdued report card/earnings & guidance.
BANK NIFTY FUTURE
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To make a long story short, short the market in the near term.Like 0
Such a long essay on Bank Nifty without a word about HDFC Bank result and its likely impact ?!?Like 1
very niceLike 0
Well researched wonderful article.Like 0