Nifty Stumbled from RBI High on Negative Global Cues

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Nifty stumbled from RBI high on negative global cues amid the concern of faster Fed tightening and an imminent Ukraine attack by Russia

India’s benchmark stock index Nifty (NSEI) closed around 17374.75 Friday, stumbled almost -1.31%on negative global cues amid the concern of faster Fed tightening as US inflation accelerated to a 40-years high (+7.5%) in January. In early European session Friday, Dow Future further tumbled, pulling Nifty Future as Fed may hike even before March meeting to control surging inflation before Nov’22 U.S. mid-term election. Risk trade sentiment was also affected as some influential market participants such as Goldman Sachs (NYSE: GS ) predicted as many as seven rate hikes @0.25% for 2022 against market expectations 4-of 5 hikes.

On Friday, after hotter than expected inflation data, the White House even issued a statement, effectively providing a green signal to Fed to go ahead with liftoff even before March’22 meeting: “It is appropriate for the Fed to recalibrate support."

Now from global to local, India’s Nifty made a post-budget high of 17794.60 on 2nd February on the ‘no harm’ budget. Although the FY23 budget may not be called a blockbuster, the fact that there was no tinkering with Long Term Capital Gain Tax (LTCGT) was being apprehended by the market. This, along with fiscal prudence, substantially higher CAPEX/infra stimulus, targeted structural reform and no big bang populism (for poll-bound five states) boosted the risk-on sentiment and the Nifty jumped.

But Nifty soon stumbled and made a low around 17043.65 on 8th February on negative global cues, some budget disappointment (after reading fine lines), and the concern of RBI signal of tightening. But Nifty jumped and made a high around 17639.45 on a dovish hold by RBI. The market was expecting a hawkish hold, where RBI may hike the reverse repo rate and signal liftoff from April/June’22 onwards in line with US Fed to control inflation and minimize policy divergence/rate differential. But RBI unexpectedly sounded less dovish on inflation and didn’t signal any tightening plan. Subsequently Nifty made a relief rally, while banks also jumped on higher effective reverse repo rate at +3.87% vs prior +3.75% and official rate +3.35%.

In other words, banks are now getting more risk-free returns from the Central Bank (RBI) and deploying excess cash with the RBI, rather than giving riskier loans. RBI is effectively sucking excess liquidity from the banking system/money market, which is itself acting as a backdoor tightening.

Overall, RBI ignored elevated inflation and almost signalled lower for longer policy to natural growth. And RBI also virtually acknowledged the strategy of lower for longer is to ensure the lowest possible borrowing costs for the Government, which is now paying over 45% of its core operating tax revenue as interest on public debt. In any way, RBI's stance of ignoring price stability despite sticky core inflation around +6.0% may be damaging RBI's credibility as an independent Central Bank (institution). Thus, India’s India 10-Year made a high around +6.955% last week (4th Feb), approaching +7% levels despite the RBI repo rate is now +4.0%.

Core CPI

In brief, RBI thinks, India’s elevated inflation is a result of supply chain disruptions and surging global prices of oil. Moreover, RBI sees modest consumer spending, still below pre-COVID levels. Thus RBI is ready to ignore price stability for the sake of growth. But elevated sticky inflation also affects discretionary consumer spending for the masses, which ultimately hurts economic growth. Also, the RBI policy of lower for longer and increasing policy divergence with the Fed may hurt INR against USD ( USD/INR ), which will result in higher imported inflation, especially caused by oil. Higher inflation will result in higher Indian bond yield; i.e. higher borrowing costs for the government, businesses, and even households irrespective of the RBI repo rate at +4.0%.

On late Friday, Nifty 50 Futures , Dow Jones Futures , and other stock indices plunged, while oil, gold , bonds spiked on the U.S. concern of an imminent Ukraine attack by Russia as early as Tuesday, even before the 20th February closing of the Beijing Winter Olympics. SGX-Nifty closed around 17218 on Friday US session.

Technically, whatever may be the narrative, Nifty 50 Futures now has to sustain over 17400 for any meaningful full rally to 17550/17650-17700/17825 and further 17905/18360. On the flip side, sustaining below 17350, Nifty Future may fall to 17180/17150-17100/17000 and further 16900/16840 in the coming days.

Nifty Futures

SGX Nifty

SGX-Nifty EW

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