Nifty Set to Tumble Early Thu on Fed’s Less Dovish Hold

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India’s Dalal Street set to tumble early Thursday as Wall Street tumbled overnight on Fed’s less dovish hold. As expected, Fed will now actively discuss QE tapering in forthcoming meetings, raised IOER (interest on excess reserve) to +0.15% from +0.10%, but pencilled two rate hikes (@0.25%) in 2023 against market expectations of one hike. Although, in his presser, Fed Chair Powell tried his best to downplay the dot-plots as usual, terming it virtually useless and a mere reflection of some individual FOMC members (personal forecast) and not an official committee decision/projection, Powell looked less confident this time in explaining elevated inflation, which may not be entirely transitory.

But overall, Powell stressed that Fed is not thinking about lift-off (gradual rate hikes) now, but will think about QE tapering strategy in forthcoming meetings. Although there is good progress in Fed’s dual mandate (maximum inclusive employment and price stability), still it’s not termed as substantial from Dec’20 levels. As this is an unusual situation, Fed will first focus on sustainable economic recovery/growth/maximum employment rather than price stability. But Fed is confident to balance these two contradictory mandates (maximum employment and 2% price stability) in the coming years by ensuring the goldilocks nature of the U.S. economy (not too hot or too cold).

Indian market may be under pressure on the concern of taper tantrum 2.0. But this time, RBI has a good FX reserve of almost $600B to deal with any unusual outflows (unlike during the 2013 taper tantrum). Overall, Fed may go for actual QE tapering from late/Dec’ 2022 and gradual rate hikes from late/Dec 2023. Thus, the impact may be quite limited.

Nifty stumbled from a lifetime high amid the concern of taper tantrum 2.0 and slide in metals

India’s benchmark stock index Nifty (NSEI) closed around 15767.55 Wednesday, stumbled almost -0.64% on subdued global cues ahead of the Fed meeting. The market is concerned that Fed may indicate QE tapering and gradual rate hikes from Dec’22/23 with an immediate technical adjustment in IOER (interest on excess reserve) to address the current distortion of the money/funding market.

Fed is already doing backdoor QE (reverse repo) to the tune of $600B almost every other day to absorb huge excess liquidity from the money/funding market. Fed is also withdrawing various COVID emergency liquidity facilities. The market is now concerned that Fed may now begin to think about thinking QE tapering and may also pencil one hike by Dec’23 in June dot-plot amid surging inflation and upbeat economic data. 

On Wednesday, India’s Dalal Street was also affected by metal scrips as global prices tumbled on China’s action to prevent a runaway surge and inflation. Chinese State firms were reportedly ordered to curb overseas commodities exposure and China may also release metals including copper , aluminium, and zinc from strategic reserves.

Now from global to local, on the inflation front, India’s headline inflation rate jumped by +6.3% in May, the highest in 6 months, from a downwardly revised +4.23% in April and well above market estimates of +5.3% amid higher global commodity prices including crude and edible oils. Food, fuel, and energy inflation surged. On a sequential basis, CPI jumped +1.58% in May’21.

India’s core inflation was also jumped by +6.6% in May from +5.4% in April, above the market forecast of +5.6%. India’s inflation is consistently running much above RBI’s target +4.0% even before COVID, but RBI is now emphasizing growth (economic recovery) rather than price stability, at least till FY23 (Mar’24). In India, RBI’s official price stability gauze is headline CPI, not core CPI, unlike major global central banks.

In May’21, India’s CPI index was at 160.40, compared to 150.90 a year ago (May 20), translating to an annualized inflation +6.3%. The COVID low CPI index was at 148.60 recorded in Mar’20 (lockdown period; both demand & supply issues); before COVID, CPI index was at 150.20 in Jan’20. In 2020, the average sequential CPI increase was around +0.39% against the 2019 run rate of +0.64%. In 2021, the sequential (m/m) CPI run rate is around +0.52% 9till May’21), translating to an annualized rate of around +6.24%.

In May’21, the sequential (m/m) jump in CPI was at +1.58%, quite abnormal despite COVID related transitory narratives; some of the factors like elevated global oil/commodity price, supply chain disruption, higher monetary and fiscal stimulus have an effect which may stay for next few years. Higher inflation will affect discretionary consumer spending and overall economic growth. Even if the monthly CPI rate increase by around +0.50% in June, it will translate to an annualized CPI over +6%, pointing towards a stagflation-like situation.

Technical View: Nifty and Bank Nifty Future

Technically whatever may be the narrative, Nifty Future now has to sustain over 15640-15700 levels; otherwise except more corrections.

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