Nifty wobbled from RBI optimism high on the concern of synchronized global stagflation

Nifty stumbled in line with Dow Future ahead of U.S. inflation data after the White House indicated elevated CPI

India’s benchmark stock index Nifty closed around 16201.80 Friday, slumped almost -1.68% on negative cues from Wall Street. Dow Future tumbled ahead of much-awaited U.S. inflation data after the White House indicated elevated sequential reading for May. The White House (President’s office) usually got early access to important economic data. Also European stock market was under stress after ECB indicated rate hikes @+.25% in July and September and most probably in October and December too. Locally, the Indian stock market was also affected by intensifying public protests by a particular community in Delhi and also various parts of the country over a religious issue.

Earlier there was a market perception that if sequential inflation continues to ease sequentially (m/m), Fed may pause its ongoing rate hikes in September. But now, if inflation continues to surge or even accelerates amid lingering geopolitical tensions between Russia and economic sanctions coupled with recurring Chinese supply chain disruptions (zero COVID lockdown policy) and elevated domestic demand, then-Fed has no choice but to go for +0.50% or even bigger +0.75% rate hikes in September, November, and December. In brief, the market is now concerned about synchronized global stagflation or even an outright recession.

On early Thursday, India’s Dalal Street opened lower tracking negative cues from Wall Street overnight amid the concern of stagflation and US SEC regulatory tightening. But Nifty recovered after the European market opens and made a high around 16492.80 before closing around 16478.10 (+0.74%) on positive global cues amid positive trade data from China.

Despite COVID headwinds/partial lockdowns, Chinese export jumped +16.9% in May from +3.9% in the previous month and more than double the market expectations of +8%. But the overall sentiment was also undercut by a report that China’s Shanghai is again looking to resume lockdowns following a fresh COVID outbreak. As a reminder, China is gradually exiting from its 3-months long zero COVID lockdown policy from 1^st June. Also, the European market was under stress ahead of ECB, which is set for policy tightening from July.

Nifty closed around 16356.25 Wednesday; slips almost -0.37% as it stumbled from RBI optimism high on negative global cues amid surging bond yields. India’s Dalal Street as well as Wall Street was already under stress for the last few days on the concern of faster RBI/Fed tightening and resultant hard landing of the economy. On Tuesday Dow Future recovered from the recession panic low as US bond yield also slips below 3%.

But Nifty was also boosted briefly by a less hawkish RBI hike

On Wednesday, the Nifty slipped soon after opening around 16476.25 in green and tumbled almost -181 points to 16395.40 after the RBI announcement. RBI hiked by +0.50%, higher than the median market expectations of +0.40%. But Nifty recovered soon and made a high of 16513.30 on economic soft landing optimism as RBI kept its previous projection of FY23 real GDP growth around +7.2% despite the projection of higher inflation to +6.7% from earlier +5.7%. The overall risk sentiment was also boosted as RBI didn’t hike the CRR rate as expected by the market. Also, RBI provided a monetary stimulus for the real estate/housing sector as RBI permitted local/regional Cooperative banks for more lending in both the in-home and commercial real estate sector; subsequently, real estate scrips jumped.

But Nifty again stumbled over -150 points from the session/RBI high as Dow Future slips soon after the European session starts on the concern of faster tightening on both sides of the Atlantic (Fed/ECB). Also, RBI Governor Das didn’t indicate any rate hike pause in forthcoming meetings. Despite various rhetorics, RBI has to follow Fed’s rate action to maintain the present level of policy differential. As Fed will hike by +0.50% in June and July, RBI hiked on 8^th June (ahead of Fed’s 15^th June) by +0.50% and may again hike by +0.50% in the next MPC meeting on 4^th August (against Fed’s 27^th July).

RBI’s statement:

Monetary Policy Statement, 2022-23 Resolution of the Monetary Policy Committee (MPC) June 6-8, 2022

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (June 8, 2022) decided to:

Increase the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points to 4.90 percent with immediate effect.

Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.15 percent.

The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.

The main considerations underlying the decision are set out in the statement below

Assessment

Global Economy

Since the MPC’s meeting in May 2022, the global economy continues to grapple with multi-decadal high inflation and slowing growth, persisting geopolitical tensions and sanctions, elevated prices of crude oil and other commodities, and lingering COVID-19-related supply chain bottlenecks. Global financial markets have been roiled by turbulence amidst growing stagflation concerns, leading to a tightening of global financial conditions and risks to the growth outlook and financial stability.

Domestic Economy

According to the provisional estimates released by the National Statistical Office (NSO) on May 31, 2022, India’s real gross domestic product (GDP) growth in 2021-22 was 8.7 percent. This works out to 1.5 percent above the pre-pandemic level (2019-20). In Q4:2021-22, real GDP growth decelerated to 4.1 percent from 5.4 percent in Q3, dragged down mainly by weakness in private consumption on the back of the Omicron wave.

Available information for April-May 2022 indicates a broadening of the recovery in economic activity. Urban demand is recovering and rural demand is gradually improving. Merchandise exports posted robust double-digit growth for the fifteenth month in a row during May while non-oil and non-gold imports continued to expand at a healthy pace, pointing to a recovery of domestic demand.

Overall system liquidity remains in large surplus, with the average daily absorption under the LAF moderating to ₹5.5 lakh crore from May 4 - May 31 from ₹7.4 lakh crore during April 8 - May 3, 2022, in consonance with the policy of gradual withdrawal of accommodation. Money supply (M3) and bank credit from commercial banks rose (y-o-y) by 8.8 percent and 12.1 percent, respectively, as of May 20, 2022. India’s foreign exchange reserves were placed at US$ 601.4 billion as of May 27, 2022.

CPI headline inflation rose further from 7.0 percent in March 2022 to 7.8 percent in April 2022, reflecting a broad-based increase in all its major constituents. Food inflation pressures accentuated led by cereals, milk, fruits, vegetables, spices, and prepared meals. Fuel inflation was driven up by a rise in LPG and kerosene prices. Core inflation (i.e., CPI excluding food and fuel) hardened across almost all components, dominated by the transport and communication sub-group.

Outlook

The tense global geopolitical situation and the consequently elevated commodity prices impart considerable uncertainty to the domestic inflation outlook. The restrictions on wheat exports should improve the domestic supplies but the shortfall in the Rabi production due to the heat wave could be an offsetting risk. The forecast of a normal southwest monsoon augurs well for the Kharif agricultural production and the food price outlook. Edible oil prices remain under pressure on adverse global supply conditions, notwithstanding some recent corrections due to the lifting of the export ban by a major supplier.

Consequent to the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices. There are also upside risks from revisions in the prices of electricity. Early results from manufacturing, services, and infrastructure sector firms polled in the Reserve Bank’s surveys expect further input and output price pressures going forward.

Taking into account these factors, and on the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of US$ 105 per barrel, inflation is now projected at 6.7 percent in 2022-23, with Q1 at 7.5 percent; Q2 at 7.4 percent; Q3 at 6.2 percent; and Q4 at 5.8 percent, with risks evenly balanced.

The recovery in domestic economic activity is gathering strength. Rural consumption should benefit from the likely normal southwest monsoon and the expected improvement in agricultural prospects. A rebound in contact-intensive services is likely to bolster urban consumption, going forward. Investment activity is expected to be supported by improving capacity utilization, the government’s capex push, and strengthening bank credit.

The growth of merchandise and services exports is set to sustain the recent buoyancy. Spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks, and tightening global financial conditions nevertheless weigh on the outlook.

Taking all these factors into consideration, the real GDP growth projection for 2022-23 is retained at 7.2 percent, with Q1 at 16.2 percent; Q2 at 6.2 percent; Q3 at 4.1 percent; and Q4 at 4.0 percent, with risks, broadly balanced.

Inflation risks flagged in the April and May resolutions of the MPC have materialized. The projections indicate that inflation is likely to remain above the upper tolerance level of 6 percent through the first three quarters of 2022-23. Considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions. The supply-side measures taken by the government would help to alleviate some cost-push pressures.

At the same time, however, the MPC notes that continuing shocks to food inflation could sustain pressures on headline inflation. Persisting inflationary pressures could set in motion second-round effects on headline CPI. Hence, there is a need for calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures. Accordingly, the MPC decided to increase the policy repo rate by 50 basis points to 4.90 percent. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

All members of the MPC – Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das – unanimously voted to increase the policy repo rate by 50 basis points to 4.90 percent.

All members, namely, Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das unanimously voted to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.

Overall, the Nifty snapped 3-week winning streaks and tumbled -by 2.31% for the week primarily on subdued global cues amid the concern of faster Fed tightening and eventual stagflation or even an outright recession coupled with higher USDINR and higher oil, negative for the overall Indian economy.

On Friday, the Indian market was dragged by techs (concern of stagflation on both sides of the Atlantic), energy (oil & gas), banks & financials, metals, realty, infra, pharma, automobiles, and FMCG to some extent. Nifty was dragged by RIL, HDFC, Wipro, Hindalco, SBI, TECHM, Tata Steel, and Sun Pharma.

Looking ahead, whatever may be the narrative, technically, Nifty Future now has to sustain over 16255 for any bounce back towards 16385/16535-16785/16850 and further 16925/17075-17175/17225 and 17325/17450-17700/18000; otherwise sustaining below 16200, Nifty Future may further fall to 16125/15950-15730/15650 in the coming days.

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