Nifty Jumped to Almost 18K on Positive Global Cues and Hopes of Slower RBI Hikes

  • Market Overview

India’s benchmark stock index Nifty closed around 17927.65 Monday; jumped almost +0.53% on positive global cues and hopes of slower RBI tightening; Nifty made a high of 17980.20, almost 18000 levels, and rallied 1.75% in the last three trading days. Wall Street was buoyed on hopes of calibrated Fed tightening and as the USD slips from a 20-year high. Also European market recovered last week after details of fiscal stimulus by the EU over higher gas/energy prices to guard businesses and households to some extent. And lower oil prices below $85 helped the risk trade as this will be negative for inflation.

On Thursday, ECB surprised the market to some extent and hiked all its key policy rates by +0.75%; i.e. reference interest rates on the main refinancing operations (interbank rate) to +1.25%; interest rates on the marginal lending facility (MLF-repo rate) to +1.50%, and interest rate on deposit facility (DRF-reverse repo) to 0.75%.

Fed is set for Dec’22 terminal rate at least +4.00%; i.e. +150 bps more cumulative hike in September, November, and December. Fed may hike +50 bps each in three months or +75 bps in September followed by smaller +25 bps each in November and December. On the other side, ECB is already far behind the Fed as well as the inflation curve and started rate hikes only in July (against Fed’s March). Thus ECB now may have no option but to go for jumbo hikes @+75 bps, not only in September but also for November and December.

Overall, Fed is now talking about calibrated tightening to take care of both price stability (inflation) and economic growth (employment). Both elevated/sticky inflation and higher unemployment are bad for the lower spectrum of the population; i.e. people who have lower disposable income and survive on pay check to pay check basis. As inflation is easing along with the labor market, Fed may now afford to calibrate hiking instead of jumbo hikes.

Thus, assuming +50 bps rate hikes action by Fed in September, November, and December, RBI may also hike @+25 bps in September, December, and February’23 for a terminal rate of +6.15% minimum. RBI may also hike @+50 bps if Fed goes for +75 bps. RBI may also hike another +35 bps along with +25/50 bps in Feb’23, if Fed goes for minimum +25 bps rate hikes in Jan’23. RBI will ensure a positive real rate or at least zero real rates assuming core CPI is below +6% by Feb’23.
Indian real GDP contracted -9.6% sequentially in Q1FY23, while grew +13.5% yearly against market expectations +15.2%. After subdued GDP reading, the Indian Finance Minister is now batting for economic growth rather than managing inflation by curtailing demand. RBI Governor Das is also emphasizing that inflation may be plateauing and thus we may expect a slower pace of tightening going forward.

India's August Passenger Vehicles Sales Down 4.3% sequentially:

On Friday, SIAM data shows total passenger vehicle (PV) sales in India dropped by -4.3% sequentially (m/m) to 281,210 units in August, reversing from a +13.1% jump in July and marking the first drop in three months. On a yearly basis, car sales grew -by 8.3%. SIAM said: "While good monsoon and the upcoming festive season are likely to increase demand, SIAM is keeping a close watch on the dynamic supply-side challenges. High CNG prices are a big challenge for the industry and we keenly look forward to the kind interventions and support from the Government.”

On Monday, India’s 10Y bond yield made a low of around +7.122% in line with falling yields for global bonds, well off from the June’22 high of +7.617%. India’s bond was helped by hopes of the inclusion of Indian bonds in global indices. Morgan Stanley (NYSE: MS ) expects an announcement that India will be included in JPMorgan (NYSE: JPM ) & Chase Co.’s emerging markets (EM) bond index soon with the actual entry in the 3rd quarter of next year. Lower bond yields; i.e. higher bond prices are positive for the bank’s EBITDA, especially for PSU Banks.

On Monday, MOSPI data shows India’s inflation (CPI) rate rises to a 4-months high of 7%

Headline inflation (CPI) in India accelerated for the first time in four months to 7% in August from 6.71% in July, above market expectations of 6.9% (y/y). Prices increased faster for food (7.62% vs 6.75% in July), with meat and fish (206.4%), oils and fats (192.4%), spices (193.6%), vegetables (186.6%), and fruits (172.9%) recording the biggest increases. Prices of housing (4.06% vs 3.9%); and education (5.51% vs 5.02%) also accelerated while a slowdown was seen in fuel and light (10.78% vs 11.8%); transportation & communication (5.2% vs 5.55%) and health (5.43% vs 5.45%). On a sequential basis (m/m), the headline CPI surged +0.52% in August from +0.46% in July. In August, India’s core CPI surged to +5.9% against +5.8% in July (y/y).

Overall, in 2022 (till August), India’s headline CPI was around +6.8%, while core CPI was +6.1% on average, both far above RBI’s +4.0% target and also substantially above RBI’s upper tolerance levels of +6.0%. The average sequential rate of headline CPI is now around +0.6% in 2022, which is equivalent to a +7% annualized rate. Being a part & parcel of the global economy, the Indian economy is now also a victim of synchronized global stagflation. In that sense, lower prices of oil and lower USDINR are positive for lower imported inflation and also helped Dalal Street to some extent.

On Monday, Nifty was helped by RIL, INFY, Axis Bank (NS: AXBK ), ICICI Bank (NS: ICBK ), Bajaj Finance (NS: BJFN ), Titan (NS: TITN ), Adani (NS: APSE ) Ports, TCS (NS: TCS ), Tata Steel (NS: TISC ), and TECHM (NS: TEML ), while dragged by HDFC Bank (NS: HDBK ), HDFC (NS: HDFC ), Coal India (NS: COAL ), HUL, Nestle (NS: NEST ) India, M&M (NS: MAHM ), Shree Cement (NS: SHCM ) and Asian Paints (NS: ASPN ). On Monday, the broader Indian market was helped by realty, media, IT/Techs, PSU Banks, infra, energy, metals, MNC, selected private banks, automobiles, pharma, and FMCG to some extent.

The FY22 Nifty consolidated EPS was around 762. As of 12th September, Nifty EPS is around 837.80, while it was 809.24 on 30th June. As per the present sequential run rate, Nifty consolidated EPS may grow by around +20% in FY23 to around 914 and in that scenario, at around 20 average PE, the fair valuation of Nifty maybe around 18280; i.e. Nifty may scale around 18300-600 (lifetime high) by Mar’23 or even before by Dewali, supported by a stable macro-economic outlook, leveraged corporate balance sheet and adequate pricing power despite higher inflation, higher borrowing costs and various global headwinds.

Higher USDINR may also support Nifty consolidated EPS as around 40/50% of Nifty earnings come from exports. Further sustaining above 18650 lifetime high levels, Nifty may scale 21150-22000 levels by FY24. India is currently enjoying EM scarcity premium amid political and policy stability coupled with the attraction of 5D (democracy, demand, demography, deregulation, and digitalization).

Looking ahead, whatever may be the narrative, technically, Nifty Future now has to sustain over 18050 for a further rally towards 18175/375 and 18600 lifetime high levels; otherwise, sustaining below 18000, Nifty Future may fall towards 17750/17630-17430/17330 and 17200/17090-16935/16800-16375/16275 and lower zones in the coming days.

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  • Vivek Purav @Vivek Purav
    What happened to your views within 10 days. What you see now need not be same after few days .
    Like 0
  • Bhanu Pratap Singh @Bhanu Pratap Singh
    ressesion comes because inflation is very high in Europe countries
    Like 0
  • prabhat aggarwal @prabhat aggarwal
    excellant article.
    Like 0

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