Nifty surged on hopes of RBI rate/CRR cut to avoid a hard landing

·         RBI may cut 50 bps on 6th December’24 based on core CPI to stay ahead of the curve rather than waiting for Feb’25 as the trend indicates only 5% growth in FY25
·         India’s average unemployment rate remains around 8% while core CPI is 3.4% in 2024 and real GDP growth may come to around 5.0% for FY25
·         Indian economy may be now in a stagflation scenario amid slowing economic growth, rising unemployment, and elevated inflation
·         RBI shorted around $60B USDINR in the forward market quite recklessly to strengthen Rupee (INR), which may backfire and cause more imported inflation and various macro issues
·         The 3rd term of RBI Governor Das may not be extended after 10th December as he is reportedly not paying attention to rate cuts and relying too much on total CPI/food inflation

India’s benchmark stock index, Nifty surged in the last few days as risk-on sentiment improved even after terrible GDP growth amid hopes of an imminent rate cut. RBI may cut rates by 50 bps on 6th December to stay ahead of the curve and prevent a looming hard landing. But as the market was not prepared for the sudden rate cut due to the lack of any credible forward guidance by the RBI Governor Das, RBI may also now cut only CRR by 50 bps to ease tight banking liquidity and spur lending, while indicating the inevitable rate cut from Feb’25.
Until recently, India’s Central Bank RBI was still not in a clear mood to cut rates, despite India’s unemployment rate remaining elevated above 8% on average for at least the last two decades and jumping above 10% even in October, while core inflation hovering well below 4.0% targets for almost last twelve months. Various high-frequency indicators were also pointing out a looming economic slowdown, despite the RBI/Government stance that all is good (‘sab changes hai’)
Previously Nifty made a low around 23463.15 on 21st November and subsequently recovered to around 24351.55 on BJP/NDA’s much better than expected win in the Maharashtra election, which may help to consolidate PM Modi’s control over Indian politics & policies; the market got some boost on hopes & hypes of blockbuster economic reforms in India by ‘strong’ Modi 3.0.
But that optimism soon faded as it became clear that the recent blockbuster/unexpected election win in Haryana and Maharashtra by BJP/NDA 3.0 without active contribution by Modi 3.0 may be highlighting the fact that BJP/RSS can also win elections without even any so-called Modi wave. Although PM Modi is a great political leader, he is also approaching 75-80 years of retirement age in BJP from active electoral politics.
However, recent state election success shows that BJP/RSS can win state elections even without Modi's active leadership role. BJP/RSS has good election management capability (hook & crook), strong ground-level political organizations, huge resources/helicopter money (Rabin Hood politics-vote for cash), and social engineering capabilities. Thus BJP/NDA may also win the next big election in Bihar and even in Delhi and Modi 3.0 may also be extended full tenure to May’29. But pragmatic PM Modi may also take self-retirement by Dec’25 from active electoral politics to become an active member of BJP’s political strategy think tank after a ‘good performance’ in state elections (post the debacle in June’24 general election).
In any way, irrespective of Modi or no Modi, the Indian political landscape is now heavily fragmented among various small/big regional parties across India. The resultant rainbow politics/coalition government across various states in India in support of two main political parties BJP-IND directly/indirectly is causing political & policy paralysis to some extent.
Also, a weak Modi 3.0 at the Federal government and lack of an absolute majority of BJP in two houses of the Parliament (LS and RS) is causing a policy paralysis-like scenario. Even smaller regional allies of BJP and their leaders are now not in the mood to obey ‘weak’ Modi amid diminishing Modi wave and autocratic hold, which was unthinkable before Feb’24.
In brief, Modi 3.0 is now too busy with various state elections and political permutations & combinations along with ‘Operation Lotus’ i.e. focusing too much on politics rather than economics and bold economic & social policy initiatives. Although initially, during Modi 1.0, PM Modi was quite liberal and flexible, he was reportedly changed after the failure of Demonetization and centralized all major and even minor policy issues within PMO. Thus policy file moving delay is now a major issue, affecting the Indian economy.
Moreover, India’s Dalal Street was also under the stress of the never-ending Adani saga; although the Adani group of stocks has negligible weightage compared to RIL, HDFC banks, and other blue-chips, the fact that various allegations against Adani group also raised the quality of corporate and also political/judicial/regulatory governance in a country like India, where corruption is rampant and a way of life even for day-to-day issues.
The recent controversy surrounding the Adani Group involves serious allegations of bribery, fraud, and misconduct under U.S. laws. The U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have brought charges against Adani & Co., affecting India’s Dalal Street. But Nifty also recovered last week after some prominent BJP/Modi savvy high profile lawyers debunked the US DOJ indictment against the Adani group involved in the bribing scam of various government officials for solar power projects.
Before that India’s Nifty crumbled over 10% from a recent life time high on subdued corporate earnings growth, expensive valuation, concern about the Trump trade war, elevated & sticky headline inflation, hawkish RBI, and the never-ending Adani scam saga. Adani group is highly leveraged and dependent on borrowing to support various infra projects including mining & querying in India and various other countries. Now after the latest bribery scam, global rating agencies downgraded the group, which may affect its fundraising capacity. Also, various other countries are canceling their infra/other contracts with the Adani group, denting the overall image of not only Adani but also India.
India’s Nifty may have run too much ahead of its potential on Modi 3.0 optimism, but may now fall back to reality as Modinomics failed to boost corporate earnings meaningfully due to a lack of much-needed economic and policy reforms at the ground.
In H1FY25, Nifty rallied almost 30% against the normal average run rate of 23% for the whole year. Also, despite the huge flow of black money, India’s discretionary consumer spending is under stress due to the high cost of living, elevated unemployment, and under-employment. Faulty & complex models of GST, high indirect taxations & tariffs, high energy, and business establishment costs, and higher input costs are affecting corporate earnings. India is also losing its competitiveness in the goods export market despite the advantage of relatively cheaper labor costs and devalued currency.
Also, India needs to invest much more in innovation to improve the productive capacity of the economy to be a developed economy with improved GDP/Capita and inclusive growth. Indian stock market is now losing the so-called EM scarcity and Modi premium due to extreme political/electoral funding corruption by almost all major political parties in the country. This along with Rabin Hood's Politics & policies (24/7 Helicopter Money) is causing a higher public deficit, higher public debt, and higher currency devaluation. There is no price stability and the lower middle class is in trouble to meet the higher cost of living, especially in urban metro areas. This is affecting urban discretionary consumer spending and overall economic activity. Market impact:
On Monday (2nd December), India’s Nifty 50 slumped in the early opening session due to subdued economic growth and Trump’s rhetorics of imposing 199% tariffs in BRICS nations including India as a ‘punishment’ for any potential plan to introduce BRICS currency and undercut the global hegemony of USD.
But by mid-Monday, Nifty recovered as the market may be still assuming the Q3FY25 GDP ‘shocker’ as an exception or transient; the Indian economy may soon revive to grow around 7% (if not 8%). Nifty recovered on hopes of an imminent rate cut by RBI as soon as on 6th December or Feb’24 with a dovish hold tone this week. RBI Governor Das may not hesitate to take ‘bold unexpected’ policy action to cut even 50 bps also respond to growing demand from North Block (Modi admin).
Although RBI rate cuts will be beneficial for the Indian economy and the stock market, banks & Financials may not be so much boosted as lower rates and lower spreads may be negative for their business/lending models; but at the same time lower borrowing costs might ensure lower NPAs. Also, a sudden/unexpected rate cut and shorting of huge USDINR by RBI may weaken INR against USD, which will be positive for export-savvy Nifty, although it may be devastating for the import-oriented Indian economy. USDINR may soon break 85 areas for 90-95 and even 100 by the next few years.

Technical Analysis: Nifty Future

Whatever may be the fundamental narrative, technically Nifty Future has to sustain over 24800 for any further rally to 25250/25450 and further to 25650/26000-26200/26500 and 26650/26800-27000/27200 in the coming days; otherwise sustaining below 24750, Nifty Future may again fall to 24500/300 and 24150/24000-23800/23650 and further to 23400/23350 and 23100/23000-22850/22700 and 22450/22150-21250/21000 in the coming days.