India’s benchmark stock index closed around 17759.30 Tuesday; jumped almost +2.58% on positive cues from Wall Street Futures as the USD retreats to some extent along with oil. India’s Dalal Street was also boosted by robust FII buying of over Rs.4B on Tuesday alone against negligible DII selling. But overall Wall Street is under stress amid ongoing hawkish jawboning by various Fed policymakers after Chair Powell’s Jackson Hole speech made a hole in Wall Street.
Further on Tuesday tumbled on renewed China-Taiwan geopolitical tensions after the Taiwan military said it fired warning shots for the 1st time at a Chinese drone that buzzed an islet controlled by Taiwan near the Chinese coast. The Drone headed towards China after shots were fired, while China has sent warships through the Taiwan Strait, also in breach of the median line (almost daily through August). But the overall impact was limited after it was reported that the alleged Chinese drone was civilian rather than military.
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.
Looking ahead, Fed will continue to hike for the rest of 2022 (September, November, and December), but maybe with a slower pace @ +0.50% instead +0.75% (subject to actual inflation reading)-if inflation does not surprise the upside. From September, Fed will also increase the pace of QT, which will cause further tightening in financial conditions (higher bond yields/borrowing costs). Fed also acknowledged trajectory of inflation is dependent on non-monetary conditions such as Russia-Ukraine/NATO war/geopolitical tensions and subsequent economic sanctions, causing supply chain disruptions and higher inflations.
Financial (Wall Street) stability is also an unofficial mandate for the Fed besides price stability, especially ahead of the Nov’22 U.S. mid-term election. On Friday, Fed Chair Powell sounded moderately hawkish. Fed may hike another +150 bps minimum in the rest of 2022 (September, November, and December) as inflation is still substantially higher than Fed’s 2% target despite some early signs of easing, while economic growth is still robust and the labor market still tight despite some early signs of moderation. Fed may continue to hike @+25 bps in H12023 for a positive real rate compared to at least core PCE inflation.
Ahead of Nov’22 U.S. mid-term election, expect cooler inflation and hotter employment data for a ‘Golden Recession’ narrative by the White House. Fed, on its part, will jawbone the market for a +75 bps hike in September to not only control inflation expectations but also to ensure a pre-election rally in Wall Street as Fed may eventually hike by +50 bps after jawboning for +75 bps, which will be seen as a less hawkish hike.
Now from global to local, as highly expected, India’s central bank RBI hiked all policy rates by +0.50% on 5th August against Fed’s +0.75% move on 27th July. Overall, RBI sees robust domestic economic activity but elevated inflation till FY23, not only substantially above RBI’s +4.0% target but also above the upper tolerance band of +6.0%. Thus RBI has to tighten in a calibrated way to bring inflation down by curtailing demand (economic slowdown) without causing an all-out recession for a safe and soft landing. RBI (Governor Das) dialed back its earlier narrative of decoupling with the Fed after INR plunged against USD, causing more/higher imported inflation. RBI is now following Fed’s rate actions, whatever may be the narrative.
RBI also sees sticky domestic inflation as a function of imported inflation and global supply chain disruptions rather than elevated domestic demand and constrained supply. RBI will continue to tighten to keep under control, which will also control imported inflation.
Thus RBI will follow Fed’s rate action to keep the policy rate, currency, and real bond yield differential under control, everything being equal. Like most other major G10 central banks, RBI is now following Fed with a -25 bps spread; i.e. if Fed goes for a +75 bps rate hike, then RBI will hike +50 bps; if Fed goes for +50 bps rate hikes, then RBI will hike +25 bps.
Looking ahead, Fed will continue to hike for the rest of 2022 (September, November, and December), but maybe with a slower pace @ +0.50% instead +0.75% (subject to actual inflation reading)-if inflation does not surprise the upside. From September, Fed will also increase the pace of QT, which will cause further tightening in financial conditions (higher bond yields/borrowing costs). Fed also acknowledged trajectory of inflation is dependent on non-monetary conditions such as Russia-Ukraine/NATO war/geopolitical tensions and subsequent economic sanctions, causing supply chain disruptions and higher inflations.
Ahead of Nov’22 U.S. mid-term election, expect cooler inflation and hotter employment data for a ‘Golden Recession’ narrative by the White House. Fed, on its part, will jawbone the market for a +75 bps hike in September to not only control inflation expectations but also to ensure a pre-election rally in Wall Street as Fed may eventually hike by +50 bps after jawboning for +75 bps, which will be seen as a less hawkish hike.
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%:
On Wednesday, Government flash data (MOSPI) shows Indian real GDP was around Rs.36.85T vs 40.78T sequentially (-9.64%) and 32.46T yearly (+13.52%); i.e. the Indian economy contracted -9.6% in Q1FY23 sequentially (Q/Q), while expanded +13.5% yearly (y/y) against market expectations +15.2% (due to lower base effect in the previous year). In Q1FY23, Indian GDP was sequentially dragged by lower consumer spending (-2.39%), lower government consumption (-10.39%), lower capex (private + public; -6.78%), lower inventories (-29.41%) and higher imports (+8.64%), while exports were almost flat (-0.24%). Overall, higher borrowing costs, and higher inflation have affected the Indian economy. But at the same time, some economic contraction may also result in lower inflation going forward.
Overall, India’s Nifty jumped +3.50% in August after a +8.73% rally in July after FPIs turned net positive buyers; in H1CY22, FPIs were the net seller in Dalal Street, resulting in -9% slump in Nifty. Although the Indian market is now no longer FII dependent amid huge buying by DIIs, retail, HNI, and Prop desk-still FII buying is acting as a sentiment booster. FPIs turned sellers of Indian equities after an abrupt fall in INR against USD amid policy divergence between RBI and Fed. But FPIs began buying after USDINR reaches 80 levels, and RBI also fall in line with Fed and began to hike rates in line with Fed and other major G10 central banks. Generally, higher and volatile USDINR is negative for FPIs and thus stability of INR is a primary requirement for FPIs investment coupled with political and policy stability.
Indian market got a boost despite higher than expected rate hikes by RBI on 5th August (+0.50% vs market expectations +0.35%) as RBI is now following the Fed, which hiked +0.75% on 27th July. This is protecting INR from an abrupt fall and boosts FPI’s confidence. Looking ahead, if Fed goes for +0.50% rate hikes in September, November, and December instead of +0.75% due to signs of inflation easing, then RBI may also go for +0.25% rate hikes in September, December, and February; otherwise, expect +0.50% rate hikes by RBI if Fed goes for +0.75%.
On Tuesday Nifty was boosted by ICICI Bank (NS:), HDFC Bank (NS:), HDFC (NS:), RIL, INFY, Kotak Bank, Bajaj Finance (NS:), TCS (NS:), HUL, SBIN, ITC, Axis Bank (NS:), Bajaj Fin Service, L&T (NS:), Maruti (NS:), Tata Motors (NS:), Indusind Bank and M&M (NS:). The Indian market was helped by realty, banks & financials, IT/Tech, automobiles (lower prices of steel and higher supplies of chips), metals (Chinese disruption), FMCG, energy, MNC, Infra, Media, and selected pharma stocks.
Nifty may scale 18300-600 by Dewali/Mar’23 and 21150-22000 by Mar’24:
The FY22 Nifty consolidated EPS was around 762. 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.
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. On Thursday (1st September), Nifty Future has to sustain over 17700 levels for a further rally towards 18000; otherwise sustaining below 17650, it may correct again.
