RBI is set for another hawkish hold; what about Nifty, USDINR?

Summary

The next Nifty move will depend upon U.S. inflation data/Fed/RBI stance and trajectory of Q1FY24 earnings/guidance

India’s benchmark stock index Nifty snapped three days losing streaks Friday and surged +0.70% to close around 19517.00 on positive global cues amid hopes & hypes of a Fed pause ahead of July U.S. NFP/BLS report. But on Friday, Dow Future stumbled from a soft NFP headline high as the overall U.S. job report was mixed/goldilocks in nature, which may not prevent Fed from another hike in November after a possible pause in September.

The US economy added 187K payroll jobs in July, missing market expectations of a 200K rise and way below ADP data of above 400K, but the unemployment rate unexpectedly fell to 3.5% and hourly earnings surpassed estimates at a 4.4% yearly growth and average monthly earnings registered positive growth for the 1^st time in real terms in June (adjusted CPI growth). Also, the BLS household survey shows an addition of +268K employed persons in July after +273K additions in June. The Fed is now not concerned about labor supply/number of jobs/employed persons, but concerned about elevated wage growth.

On Friday, Wall Street Futures were also dragged by subdued report card by index heavyweight Apple; although earnings were mixed, guidance for the next September quarter was subdued amid lingering macro-headwinds, higher borrowing costs, and a slowdown in China.

Last week, Wall Street was also dragged by an unexpected Fitch downgrade of U.S. credit rating to AA+ from coveted AAA citing the possibility of further fiscal deterioration over the next three years and the recurring debt ceiling negotiations that threaten the government's ability to pay its bills. But Fitch kept the U.S. credit outlook stable from prior negative and kept the country ceiling at “AAA”.

But Wall Street soon recovered as Fitch's downgrade does not alter the attractiveness of US debt in a world of ultralow bond yield. Also, although some of Fitch’s concerns regarding U.S. public debt, and political & policy paralysis may be valid, the reality is that the U.S. is the world’s safest and most trusted borrower.

Thus overall, the impact of US rating downgrade by Fitch is quite limited as such a downgrade will not affect the attractiveness of U.S. debt. Also, as long as USD is the global reserve currency and the US can borrow in USD (local currency), there is no risk/concern for the U.S. Everyone /every country needs USD for global trading and other global economic activities. Thus USD is always in demand despite Fed’s never-ending QE (24/7 printing).

No country or even corporates ever pays back the full principal amount of debt; what matter is the interest expenses in terms of revenue (like Interest/EBITDA %). The U.S. has paid around 8.5% of revenue as interest on public debt on an average before COVID years, which surged to over 10% during COVID years, decreased to 8.70% in FY21, and clocked around 9.72% in FY22; i.e. almost around 10% on an average, which is double than EU/China average. If such a trend continues, the U.S. may have to pay almost 15% of its revenue as interest on public debt in the coming years, which would be a red flag in AEs.

Thus Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) by lower inflation/lower bond yield to fund endless deficit spending and mammoth public debt of over $32T sustainably. U.S. political system of Mid-term election just after 2-years of Presidential Election results in political & policy paralysis to some extent most of the time and the White House (President) has to operate a minority government for the last two years even if had a majority (trifecta) in the 1^st two years.

Recently, we have seen it during both Trump (Republican) and Biden (Democrats) Presidency and may continue to see the same trend in the future. But both political parties eventually make a bipartisan agreement in the last moment for the best interest of the country after vigorous/intense debates/negotiations, which is acting like a partial political & policy paralysis, despite adequate checks & balances.

In any way, Wall Street was also dragged last week by hotter-than-expected ADP Private Payroll job data, but eventually recovered to pre-ADP levels on softer-than-expected NFP/BLS Private Payroll job addition, but eventually stumbled as the overall U.S. employment is still near maximum levels, while core inflation is substantially above +2.0% targets; thus Fed may go for another hike in November before the final pause and sit tight at least till Q1CY24.

Now from Wall Street to Dalal Street, India pays around 45% of tax revenue as interest on public debt currently on an average, which is probably the biggest issue for any rating upgrade from the current status of BBB- Stable (just one notch above junk) despite various green shoots and political/policy stability with no governance concern.

India Manufacturing PMI Edges Down to 3-Month Low in July:

On 1^st August, data from the S&P Global shows India’s Manufacturing PMI edged down to a 3-month low of 57.7 in July from 57.8 in June, but above market consensus of 57.0, pointing to the 25^th straight month of growth/expansion (above 50.0) in factory activity. The S&P Global said Indian Manufacturing output expanded the least in 3 months but the rate of rise remained substantial as it continuously rose since July 2021. Also, buying levels rose slightly softer than the 12-year peak in May. New orders rose sharply again while growth in new orders picked up to the fastest since November 2022.

Meantime, the solid pace of job creation was broadly in line with those in May and June, and outstanding business went up for the 19th month. Lead times were shortened for the fifth month, albeit marginally. On prices, input cost inflation hit a 9-month peak but was softer than the series average. Selling prices were higher, but the rate of inflation eased to a 3-month low. Lastly, sentiment stayed above the series average, in hopes that demand will remain elevated.

India Service Sector Growth Strongest in Over 13 Years in July:

On 3^rd August, the S&P Global data shows India’s Services PMI surged to 62.3 in July from June's three-month low of 58.5, and market consensus of 58, pointing to the highest monthly expansion in over 13 years, boosted by rises in new orders, mainly in international sales. The new export business grew the most since the series began in September 2014, with Bangladesh, Nepal, Sri Lanka, and the UAE being the key sources of growth.

Meanwhile, employment increased slightly, with the rate of job creation at the same pace as in the prior two months. On the pricing front, input cost inflation accelerated to a 13-month high due to higher food, labor, and transportation costs. Meanwhile, output cost inflation eased to the softest in three months amid efforts aimed at preventing any negative impact on new business. Lastly, business sentiment weakened from June's six-month high amid concerns about extreme weather.

India Composite PMI Hits Record High in July:

Finally, S&P Global India Composite PMI surged to a new lifetime high of 61.9 in July from 59.4 sequentially, led by a mainly near-record upturn in service export.

The S&P Global said about India’s July Composite PMI:

"The resilience of the service sector underscores its vital role in fueling India's economy, with the PMI results for July so far pointing to a notable contribution from the sector to overall GDP for the second fiscal quarter. The broad increases in sales across the domestic and international markets are particularly welcoming news, especially in light of the challenging global economic scenario. Firms noted a widespread upturn in services exports to several nations including Bangladesh, Nepal, Sri Lanka, and the UAE.

Looking at PMI price indices in recent months, it seems that competitive advantage continued to support demand for Indian services, with increases in output prices here modest relative to several other nations. Although input cost inflation ticked higher in July, service providers were again cautious in their price-setting decisions amid efforts to not deter sales."

Overall, RBI is quite optimistic about India’s GDP growth but is still concerned about elevated sticky core inflation. RBI is also quite optimistic about maintaining India’s price, financial, and growth stability through its calibrated policy action. As India’s core CPI is still substantially higher than targets, while real GDP growth is almost in line with the potential trend, RBI is still open for another one +25 bps rate hike. If Fed indeed goes for another rate hike in H2CY23 for a repo rate of +5.75%, RBI may go for at least another +25 bps rate hike by Dec’23 for a corresponding repo rate of +6.75%; otherwise, RBI may continue to hold at +6.50% in FY24.

Bottom line:

In any way, on 10^th August, RBI may again go for a hawkish hold stance as India’s 6M rolling average core CPI inflation was around +5.10% in 2023 (till June) against +6.00% average for 2022. Also, RBI has to take care of USDINR as consistently higher USDINR may also boost imported inflation, especially for fuel/oil, fertilizer/other commodities, and also certain food grains.

Apart from US economic data, Fed rate action, Nifty may also be influenced by the Q1 earnings report and inflation data. India’s core inflation may jump and stay elevated and sticky due to underlying structural issues like higher logistic costs and adverse weather conditions, which pushed food inflation substantially higher in the last few months. If Fed goes for a pause in H1CY24 and some cuts in H2CY24, then RBI may also follow and may go for a 50 bps cut in Apr’24, just ahead of the May’24 general election. RBI may like to ensure at least +50 bps real interest concerning core CPI; if core CPI indeed stabilizes around +5.00% in early 2024, then RBI may keep the repo rate at 5.50% in FY24 and go for another 50 bps cut in H2FY24.

Market wrap:

Nifty edged down -0.13% and closed around 19570.85 Tuesday on subdued global cues amid soft Chinese export/import/trade data. Nifty opened the gap up on positive cues from Wall Street (U.S.) amid hopes & hypes of a Fed rate cut in early 2024 after dovish talks by Fed’s Williams; although Fed’s Governor Bowman indicated at least another hike in H2CY24. Also, European cues were negative amid the Windfall tax on Italian banks.

On Tuesday, Nifty was boosted by ICICI Bank, Cipla, SBI Life, SBIN, Bajaj Finance, and Axis Bank, while dragged by RIL, M&M, ITC, Adani Enterprises, Bharti Airtel, HDFC Bank, TCS, and Hindalco. Overall, Dalal Street (NSE) was boosted by banks & financials, pharma, and techs/ITs, while dragged by realty, FMCG, automobiles, energy, infra and metals.

Technical Analysis: USDINR and Nifty Future (LTP: 19609)-EOD: 08/08/23

Looking ahead, whatever may be the narrative, technically, Nifty Future now has to sustain over 19750 for a further rebound to 20000-20050*/20100-20250*/20375 and 20650/21050-21550/21650 in the coming days (Bullish case scenario). On the flip side, sustaining below 19650-600 Nifty future may again fall to 19550/19490-19375*/19150 and further to 19090/18995*-18880/18595* and further 18350/18150*-17775/17650 in the coming days (Bearish case scenario). Now next Nifty move will depend upon U.S. inflation data/Fed stance and also RBI stance/commentary

Similarly, USDINR may scale to 85.00-85.50 if sustai8n over 83.50 in the coming days; otherwise, continue to gyrate between 83.30-81.00; USDINR may scale 85.50-90.50 levels by Mar’24, just before Indian General election amid unofficial poll/political funding (largely Indian black money channeling) and growing policy divergence with Fed; although higher USDINR is negative for overall Indian economy, it may be positive for export heavy Nifty earnings. On Thursday, USDINR may fall if RBI goes for a hawkish hold stance and vice-versa.