Nifty closed the week in green on positive global cues and lower CPI

Summary

The market is quite optimistic about Modi-3.0 and the vision of $5T nominal GDP by 2030

India’s benchmark stock index Nifty closed around 22040.70 Friday (16^th February), surged +0.59% on positive global/US cues amid hopes & hypes of an early Fed pivot after softer than expected US retail sales. India’s Dalal Street was also boosted by upbeat earnings (EPS) growth, improving macro-economic data including softer inflation and lower trade deficit coupled with a stable currency (INR) as RBI continues its hawkish hold stance without indicating any discussion about rate cuts in H2CY24, contrary to Fed’s stance, which is slated to cut 75-100 bps in H2CY24 from July’24. India has also a comfortable BOP (Balance of Payment) position despite a consistent trade deficit in merchandise export as service export is quite robust coupled with increasing remittances from ever-growing NRIs.

On Monday (12^th February), the MOSPI flash data shows India’s annual (y/y) CPI (inflation) eased to +5.1% in Jan’24 from +5.69% sequentially, in line with the market consensus and lowest in three months due to lower food & fuel inflation and favorable base effect.

On a sequential (m/m) basis, India’s total/headline CPI decreased -0.1% in Jan’24 from -0.3% in Dec’23, in line with market expectations and long-term seasonal trends due to lower food inflation, especially winter vegetables.

Overall, India’s average CPI was around +5.7% in 2023 against +6.7% in 2022 and +5.6% during CY19-23. Now the 3M/6M rolling average of total CPI is around +5.1%, quite elevated and still substantially higher than RBI’s target of +4.0% on a durable basis.

As per an unofficial estimate, India’s annual (y/y) core CPI also eased around +3.6% in Jan’24 from around +3.9% sequentially.

Overall, India’s average core CPI was around +5.0% in 2023 against +6.0% in 2022 and around +5.25% during CY: 19-23. Now the 3M rolling average of core inflation is around +3.9%, while the 6M rolling average is around +4.2%; almost at +4.0% price stability targets; the recent low was around +3.4% in Oct’19 (pre-COVID days).

On Wednesday (14^th February), government (OEA) data shows India’s annual (y/y) WPI/PPI inflation rose +0.27% in Jan’24 from +0.73% reading in Jan’23 and below the market consensus of +0.53%. On a sequential (m/m) basis, the WPI decreased -0.33% in Jan’24 against -0.98% in Dec’23.

India's WPI inflation consistently tends to be less than the CPI inflation due to several factors:

·         Weighting Scheme: The CPI places a higher weight on food items, which account for nearly 60% of the index, while food items constitute about 24.4% of the WPI

·         Exclusion of Services: The CPI includes services, that are not part of the WPI, and services inflation is expected to remain sticky due to strong urban consumption

·         Differences in Coverage: The WPI is heavily weighted toward manufactured products, while the CPI is more relevant in measuring inflation as it impacts households

·         Lower/negative WPI is also an indication of poor pricing power for manufacturers (goods producers) due to subdued domestic/global demand and fierce competition

·         At the same time consistently higher CPI indicates sticky food and service inflation

Although, India’s core inflation was steady at around +4% for the last 6 months, officially RBI follows the total CPI target of +4.0%. Also, India’s real GDP growth is now running above +7.0%, above/in line with trend/EBI estimates, RBI is now focusing on bringing back headline CPI towards +4.0% targets on a sustainable basis with a higher for a longer policy without signaling any rate cuts in H2CY24 (unlike major global central banks such as Fed/ECB).

The market was expecting some dovish stance from RBI on 8^th February (MPC meeting) such as the official declaration of the end of the tightening cycle/removal of accommodation stance to a so-called neutral stance and subsequent logical next step of rate cuts amid cooling core inflation almost around 4% targets in a sustainable basis. But RBI/Governor Das sounded less dovish than expected.

Unlike Fed/ECB, RBI, under Governor Das usually does not provide any specific/clear forward guidance, but RBI may officially announce neutral mode/end of tightening cycle in an April meeting before going for 75-100 bps rate cuts from Aug’24 (in line with Fed) as even after rate cuts of 75-100 bps, real core repo rate (compared to core CPI) will be positive and maybe still termed as restrictive rate zone.

Presently, RBI's core repo rate is around +2.00% (repo rate 6.50% - 6M average core CPI 4.50%); thus even if RBI cuts 75 bps in H2CY24 (in line with Fed), it would be around +1.25%, real positive; i.e. restrictive and also within RBI’s range of neutral policy range (1.00-2.00%). In India, RBI never goes to zero/negative real rate (unlike Fed/ECB) to stimulate the economy; RBI always maintains positive real repo rate in a balancing act to ensure no policy flip-flop cycle and financial discipline. A positive real rate is also beneficial for banks & financials amid higher NIM; this will also ensure a robust balance sheet for banks & financials, essential/good for any economy. For Fed, the neutral rate; i.e. preferred real positive rate range is 0.50-1.00%.

Now, ahead of the election, RBI may not take any undue risk by cutting rates prematurely ahead of the Fed, causing higher USDINR and higher imported inflation, everything being equal. RBI may shift to neutral mode in April and go for rate cuts from Aug’24, if the Fed goes for the same from July’24.

For the incumbent Modi government, the biggest risk for a 400+ LS seat in the forthcoming general election may be sticky & elevated inflation, now running around +5.0% for the last 4/5 years consistently, which means prices may double (+50%) even for daily essential goods & services for every 10-years if rate of inflation does not cool significantly. Also, India’s elevated unemployment rate of around 8% along with underemployment, almost 45% youth unemployment rate and significant inequality in wages is a huge political risk for the Modi government in the 2030 general election if not addressed properly despite PM Modi’s incredible leadership appeal along with development, good governance, anti-corruption, targeted social welfare schemes and Hindutva platform.

Market wrap:

For the week,  Nifty was boosted by L&T, INFY, M&M (JV with VW for EV projects and upbeat report card), ICICI Bank, HDFC  Bank, Tata Motors, Maruti (upbeat automobile sales in Jan’24), Wipro, TCS and Adani Ports, while dragged by RIL, Powergrid, SBIN, ONGC, Axis Bank (allegation of insider trading in Max Life M&A issue), NTPC, Hindalco, ITC, HUL and Kotak Bank. For the week, the Indian market (Nifty) was boosted by automobiles (upbeat monthly sales in January, PSU Banks (PSBS), Techs, energy, private banks, pharma, infra, and realty, while dragged by metals, media, and FMCG (subdued rural demand).

Technical trading levels: Nifty Future

Whatever the narrative, technically Nifty Future (22089) now has to sustain over 22200/22300* for a further rally to 22450/22675-22850/23025 and 23260-23575 levels in the coming days; otherwise sustaining below 22150/22100-22000/21900 levels, may fall to 21800/21550*-21475/21250, and further 21125/20850-20725/20575-20350. And sustaining below 20350, Nifty Future may again fall to 20150/20000-19900/19650 and 19400/19150-18850/18700 in the coming days.