Nifty Scaled Life Time High on RBI Put and India’s Progress of COVID Herd Immunity

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Nifty Scaled Life Time High on RBI ‘Put’ and India’s Progress of COVID Herd Immunity; what’s next?

India’s benchmark stock index Nifty (NSEI) closed around 15740.10 Tuesday, almost flat amid negative global cues (BTC chaos) and India’s progress of COVID herd immunity. Earlier Nifty scaled another lifetime high 15778.80 on RBI ‘put’ and easing of India’s COVID vaccination policy for below 45-years age (18-44) as the Federal government decided eventually to vaccinate all the willing people free of cost (ahead of UP and other state elections early 2022). India’s PM Modi announced Monday evening in a national address that henceforth Federal government will procure 75% of COVID vaccines produced locally to distribute it to all the states free of cost, while private sector/hospitals would be provided with the rest 25% with some cost.

Further on the COVID vaccinations front, Modi stressed higher domestic productions, R&D and assured increasing supplies in the coming days as it’s the only way to defeat the invisible enemy effectively. Modi also announced another extension of free basic foods till Deepawali (Nov’21) under PMGKAY for 800M vulnerable people. The fiscal impact (grants) would be around Rs.0.70T for this new extension, totalling Rs.1.30T; the cumulative food subsidy for FY22 is budgeted around Rs.2.43T.

Till 8th June, India vaccinated around 240M people; i.e. 17% of the population (1400M) with at least one dose of COVID vaccine, while around 3.5% of the population is fully vaccinated (2-doses). Looking ahead, policymakers are now stressing on at least single dose vaccinations for a maximum number of people with delayed 2nd or booster doses (considering the ground reality of vaccine shortage compared to the huge population). Clinical studies find that a single dose of COVID vaccine is almost 75% effective on average and ensures speedy recovery if infected in most cases.

Thus with basic COVID mitigation protocols in place (mask, social distancing, partial lockdowns, etc), continuing progress of COVID vaccinations (artificial herd immunity), and accelerating recoveries from infections (natural herd immunity), India’s parabolic COVID curve is now flattening and Nifty also galloping fast (amid increasing unlocking of the economy).

Currently, in India, almost 30M people have recovered from COVID officially. Assuming almost 10-times under-reporting (ground reality- no door-to-door pro-active COVID tests/trace), around 300M people may have already natural herd immunity against COVID. By June end, India’s 300M people may receive at least one single COVID vaccine (some of these people may have also natural immunity already).

All these permutations and combinations may be indicating that around 500-600M people should have herd immunity (natural +artificial) by June’21 (although eventually, 80% of the population has to be vaccinated for confirmed herd immunity irrespective of natural infections/recoveries). If this trend goes on, around 1000-1200M Indian people should get herd immunity by Dec’21 or early 2022; expected higher supplies of vaccines should help also. Thus, in that scenario, India’s COVID curve should be flattened completely by FY22 (Mar’22). But India has to continue its present state of targeted full/partial lockdowns till at least 80% of the population gets at least one shot of the COVID vaccine. The economy may be continued under mask amid COVID scarring (3rd wave?).
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Indian policymakers may be able to unmask the economy completely with confidence unless India can vaccinate at least 80% of the population with 2-doses of COVID vaccines. Thus the economic recovery may continue to be fragile amid COVID and economic uncertainty; discretionary consumer spending may be muted going forward after deep scaring of the devastating 2nd wave (COVID tsunami). After the devastating 2nd COVID wave, Indian policymakers/politicians may not take further risk in opening the country too fast & too much without adequate vaccinations as this may result in another deadly COVID wave.

Thus the overall economic recovery may be continued to be K-shaped (uneven) rather than an all-out V-shaped. Lack of direct cash transfer to vulnerable/most affected sectors like consumer-facing service industry (leisure & travels, malls, non-essential shops, etc) may continue to affect the Indian economy, which is mainly service oriented rather than manufacturing.

After India’s COVID tsunami (2nd wave), all major global/domestic agencies are now slashing their previous growth forecast for the country. On Tuesday, the World Bank has slashed India's GDP forecast for FY22 to +8.3% from +11.2% predicted earlier. The World Bank said economic activity will benefit from policy support, including higher spending on infra, rural development, and health, and a stronger-than-expected recovery in services and manufacturing, while maybe dragged by the tepid pace of vaccinations (compared to huge population) and full/partial lockdowns across the country since Mar-Apr’21. This will affect consumer/admin confidence and both private & government balance sheet. India may require further targeted fiscal policy support to address health and economic crisis as a result of the unprecedented COVID tsunami.

In May, Markit data show that India’s Services PMI slid to 46.4 from 54.0 sequentially (April), way below market expectations of 49.0. The latest PMI reading pointed to the first time contraction in the sector since last September, amid COVID lockdown 2.0 (partial/full across the country. Both output and new orders declined due to the reintroduction of restrictions to contain the spread of the coronavirus. External demand continued to worsen, with the new export orders falling at the fastest pace in six months, due to the international restrictions and business closures. Real estate and business services were the worst affected segment.

Meanwhile, the pace of job shedding accelerated to the fastest in the current six-month sequence. On the price front, input cost inflation eased to a four-month low. As a result, selling prices rose modestly. Looking ahead, business sentiment weakened to the lowest since last August, due to the escalation of the pandemic.

India’s Composite PMI also slips into the contraction zone to 48.1 in May from 55.4 in April, the lowest reading since Aug’20, pointing to a renewed decline in private sector activity as the service economy dipped back into contraction/recession. Softer increases were recorded in the manufacturing, but at the slowest in the current ten-month sequence of expansion. Meanwhile, aggregate new orders fell for the first time in nine months, albeit at a moderate pace. At the same time, employment declined further, marking a 15-month sequence of job shedding, with the rate of reduction was modest, but the quickest since last October. On the price front, input price inflation slowed to a four-month low. As a result, selling prices rose modestly.

Markit comments:

While PMI data released at the start of the month showed that the manufacturing industry managed to keep its head above water in May, the service sector struggled as the pandemic escalated. The intensification of the COVID-19 crisis and associated restrictions suppressed domestic and international demand for Indian services. Total sales decreased for the first time in eight months, while the fall in external orders was the most pronounced since last November.

Amid efforts to keep a lid on expenses given the deterioration in new business, services companies reduced payroll numbers to the greatest extent in seven months. Concerns towards the outlook, evidenced by a dip in sentiment, could prevent job creation in the near term. Anecdotal evidence indicated that a fall in staff expenses indeed helped curb the rate of input price inflation. Yet, the overall rise in cost burdens was historically sharp as prices for a wide range of inputs and fuel continued to surge. Only a small proportion of firms shared additional cost burdens with their clients, resulting in only a marginal increase in services fees.

Overall, Markit pointed out the grim situation of the economy and intensifying unemployment/underemployment problem coupled with structurally elevated inflation amid lingering COVID disruptions.
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At a glance as per the present correlation with composite PMI and India’s GDP growth, the Q1FY22 may be muted or even into contraction rather than a V-shaped expansion despite favorable base effects. On Tuesday, the Indian market was boosted by exporters (higher USDINR ; recovered from multi-months low) led by techs/IT, pharma, and MNC. Also, media, realty, FMCG (progress of monsoon and the upbeat rural economy), automobiles, and infra helped (reopening themes). The market was dragged by banks & financials (elevated COVID NPA/NPL-both vulnerable businesses & households) and metals (subdued global prices).

Banks were also affected by the terrible report card of PNB (NS: PNBK ) and the concern that Modi admin’s effort to privatize some selected PSU banks may result in a lukewarm response as investors may be cautious about structurally high NPA/NPL and actual levels of stress amid COVID disruptions. Also, many PSU banks are indulging in keeping legacy NPA under the disguise of restructuring by proving fresh loans to pay old loan servicing interest costs.

Overall, the sudden close down of Mumbai’ prestigious big hotel Hyatt Regency (part of Asian Hotels West) due to acute cash-flow problem (huge losses amid COVID restrictions/lockdowns) may be an indication of underlying stress levels of India’s consumer-facing service industry and lack of direct fiscal support (grants) by the government unlike in the AEs. This will invariably affect employment, income and may cause temporary distress into long-term insolvency for both households and businesses for the vulnerable contact-sensitive service industry. As a result, banks may face renewed NPA/NPL tsunami amid the 2nd COVID wave.

On Tuesday, Nifty was dragged by HDFC Bank (NS: HDBK ), HDFC (NS: HDFC ), RIL, ICICI Bank (NS: ICBK ), Kotak Bank, SBI (NS: SBI ), Tata Steel (NS: TISC ), Axis Bank (NS: AXBK ), Hindalco, LT, and JSW Steel (NS: JSTL ). Nifty was helped by INFY (win of digital tech integration contract from Archrock, a leading U.S. NG compression service provider), Bharti Airtel (NS: BRTI ) (report of increasing public preference for Airtel network rather than Jio), ITC (NS: ITC ), HCL Tech (NS: HCLT ), HUL, and TCS (NS: TCS ).

Technical View: Nifty and Bank Nifty Future

Technically whatever may be the narrative, Nifty 50 Futures now has to sustain over 15900-16025 and Bank Nifty Future 36000-36350 levels for a further rally; otherwise except some corrections.
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