Nifty slid on the concern of bubble valuation and hawkish RBI

·         ·         But at around 24500 and projected TTM (Q2FY25) EPS around 917, the FWD Nifty TTM PE may be around 22, at a reasonably fair/elevated valuation

·         At around 873 actual TTM EPS (Q1FY25), the actual TTM  PE is around 28, still in the bubble zone

·         All focus may be now on the earnings report card for Q2FY25, which has been mixed/subdued till now

·         Market focus is now also on India’s MH state and US election; If BJP/NDA wins the MH election (very low probability), it may be positive for Indian market sentiment

·         If Trump indeed wins the US Presidential election, it may be negative for EM/China/India and even Europe and also the US market for Trump trade war tantrum 2.0

·         RBI may start targeting core CPI rather than total CPI and cut rates from Dec’24

India’s benchmark stock index, Nifty made a five-month low around 24470 Tuesday (22nd Oct’24), the lowest in the last five months on relentless FIIs selling (almost Rs. 0.90T in Oct’24) after Chinese stimulus; FPIs/FIIs may be exiting overvalued Indian market to under/fair valued Chinese market. Even though Nifty corrected almost 2000 points from around 26450 to 24450, at around 24500 levels and TTM (Q1FY25) EPS 873, present NIFTY PE (TTM) is now around 28, still substantially higher than the fair PE range 20-22 and China’s present PE around 15.

Apart from China’s gain and India’s pain, India’s Dalal Street was also dragged by mixed/subdued report cards from some blue chips like RIL, INFY, TCS, and Kotak Bank while report cards from HDFC Bank, ICICI Bank, Axis Bank and TECHM were also supported Nifty. But at the same time, a hawkish hold by RBI and forecast of lower GDP growth and higher inflation; i.e. stagflation/stagnation-like scenario also dragged the market. Although RBI has changed its stance to neutral from its present restrictive and hold rate with a hawkish tone, RBI may start cutting rates from Dec’24, in line with Fed.

On the political front, although Dalal Street was relieved to some extent from BJP’s unexpected win at the Haryana (HR) state election, the fact that it was won amid Congress’ organizational/election mismanagement/internal issues rather than any Modi wind/wave. Also, Congress was the victim of its caste politics play card this time in Haryana unlike in the June General election, when BJP was the victim. But overall, as the HR election was won by BJP without the significant contribution of Modi/Sha & Co (Gujrat-GJ lobby), the Nagpur/RSS lobby may now also getting more confidence that BJP can win an election without even Modi or his active contribution.

Now looking ahead, the upcoming Maharashtra (MH) election may be crucial not only for political permutation & combinations but also for political funding as MH is the economic capital of India. Thus BJP/Modi & Co (GJ lobby) is trying its best (by hook or crook) to win this time at any cost after a terrible defeat in the recent general election. Overall, BJP/NDA is set to lose big to the IND/INC alliance in the forthcoming MH state election due to various factors going against Modi & Co, looking at the surprising HR election, BJP/NDA may also offer good performance in the MH and Chhattisgarh (CG) election or even win. This will keep BJP in an upbeat mood to win in Bihar and Delhi elections early 2025 and Modi & Co may regain strength with the party/organization (BJP/RSS) to continue the full term till 2029 without any early retirement in 2025.

But the opposite is also true and in any case, Indian PM Modi may not contest after his 3rd term expires in early 2029. Without the Modi wave, the BJP may win 150 and INC 150 seats on average in the next general election, while various regional parties across various states may get the rest of the 250 seats. Thus political and policy uncertainty may be on the rise in the coming days/years as the ‘Golden age’ of Modinomics is almost over after a decade. The Indian market has not only enjoyed a scarcity premium in the EM world for the last ten years due to Modinomics, but also to the attraction of so-called 6D (development, demand, demography, deregulation, digitalization, and democracy).

But after ten years of the Modi era, India’s development is still incremental if we measure infra, transport/traditional and also social infra/development, elevated unemployment/under-employment and youth unemployment, and sticky inflation despite years of higher borrowing costs. India’s so-called demographic dividends because of its relatively younger population are now turning into a demographic challenge/nightmare amid a lack of adequate good quality jobs/self-employment opportunities for the huge number of unemployed educated youths.

Also, India’s high taxation on goods & services (indirect taxes) is affecting consumption (consumer spending) and in turn, production. India’s automobile industry is now facing a severe slowdown or recession-like scenario due to not only EV transition issues but also higher borrowing costs, higher regulatory costs (like high road tax, insurance costs, toll tax, registration costs and even higher parking costs in a metro city/major town). The cost of maintaining a car is quite high for an Indian middle-class family in India.

Similarly, the regulatory costs of a small business (SME/MSME) in India are quite high; making the business unsustainable which in turn affects self-employment or overall employment situation in the country; India’s unemployment rate remains around 8.0% on average, almost at double-digit levels for the last two decades.

Talking about India’s inflation, the latest MOSPI data shows India’s annual (y/y) total CPI (inflation) increased by +5.5% in Sep’24 from +3.7% sequentially, above the market consensus of +5.0% after remaining below RBI’s target of +4.0% in July & Aug’24, primarily due to favorable base effect and led by a drastic fall in food and fuel prices.

In Sep’24, India’s total CPI was boosted by a slightly higher cost of food & beverages, and housing inflation, while fuel disinflation almost stalled.

On a sequential (m/m) basis, India’s total CPI surged +0.6% in Sep’24 from the prior month’s 0.0%.

Unofficial derived data shows, India’s annual (y/y) core CPI increased +3.6% in Sep’24 from +3.4% sequentially.

India’s core inflation data is not official, but derived; in any way, considering all these CPI and core CPI data, the current divergent trend between total CPI and core CPI may also indicate subdued core demand/discretionary consumer spending; and may have now in excess supply capacity than demand; i.e. consumption is lower than production.

Overall, India’s 6M rolling average (6MRA) of CPI inflation was around +4.6% in Sep’24 against +4.5% in the last report. The 2024-YTM average CPI was around +4.7% in Sep’24 against +5.7% in 2023, while the 6M rolling average of sequential (m/m) CPI was +0.7%. India’s 6M rolling average of core CPI was around +3.2%, while the same for the unemployment rate was around 8.3% (Sep’24). In the long term, the average rate of India’s total CPI is +5.8%, core CPI +5.6%, unemployment rate is 8.2%, and average real GDP growth is around +6.0%.

Overall, India’s inflation may surge further in the coming months as producers of various goods & services have increased prices soon after the June’24 general election. Further, if we assume the average sequential CPI rate is around +0.5%; we may see around +5.5% average CPI from Sep-Dec’24. Thus average CPI (inflation) may hover above 5.0% in H2CY24, making RBI’s job difficult for any rate cuts before at least Dec’24. Also, elevated inflation/cost of living over 50% every 10 years on average is a legacy issue in India due to the ever-increasing population, higher demand, and inadequate/ constrained supply capacity of the economy coupled with infra/rapid transport/storage/cold chain issues. India’s population may reach around 1.50B by 2030. In nominal GDP terms, India may be now the world’s 5th largest economy but remains lowest in terms of GDP/Capita in G20.

Policymakers and politicians have to take proper policy directions to transform India into a truly developed economy by 2050:

India’s total combined (Federal + State government) public debt & liabilities (PDL) was around INR 246.18T in FY24 against a nominal GDP of INR 295.36T and real GDP of INR 173.82T. In FY24, India’s PDL was almost 83.35% of nominal GDP against 67.06% in FY14 and 37.35% in FY2004. This indicates structurally higher fiscal deficit, higher debt, higher money printing, and devaluation of currency have caused elevated & sticky inflation in the last 20 years under both UPA and NDA. Higher fiscal spending is also causing widespread corruption at almost all levels, especially in the political funding system as a recent Electoral Bond scam shows (cut money/donations to political parties/governments for getting contracts).

India’s rampant political and administrative corruption at all levels at an unimaginable scale is causing higher & higher public debt and inadequate & poor quality public infra. India’s black money-oriented economy is huge and also causes widespread inflation through various demand channels despite elevated borrowing costs/higher RBI rates. At least 30% of India’s high-value consumer spending is backed by this black money, which does not require any borrowing at all. Thus RBI’s higher rate is largely unsuccessful in bringing down inflation unlike in AEs (US/EU). It’s also a common issue in most of the DE/EMs.

Moreover, growing competition among Indian political parties to offer/distribute dole/Helicopter money among relatively poor sections of the society to buy/ensure votes (Robinhood/Beneficiary politics) is causing higher fiscal debt, inadequate infra, higher inflation and higher unemployment. Instead of quality job creation policies, all political parties across various spectrums are too busy/preoccupied with electoral Robinhood politics.

 

India’s unemployment rate has remained around 8.0% on average for the last 20 years and if we take into account under-employment, it should be in the high double digits around 20-25%, while the educated youth unemployment rate may be around 45-50%. India is primarily a service sector and also an import-oriented economy, especially for oil, various industrial commodities, raw materials, and finished products/consumer durable goods.

India has immense potential in improving its manufacturing sector with the right policies in place to not only become less import-dependent but also become one of the largest exporters, competing with even mighty China and becoming a real democratic alternative to China in terms of a global manufacturing hub. But for that, India also has to improve its mining & querying activities along with huge stress on innovation & productivity and lower cost of production. India needs proper labor & land reform and an appropriate indirect tax policy to boost manufacturing mass-employment.

India’s real GVA growth trend may be indicating an underlying R/R of around +7.0% (y/y), lower than the real GDP R/R potential mainly due to comparatively higher taxes on goods & services. India’s GST and other indirect taxes are now the highest contributor of Federal revenue around Rs.14.80T followed by corporate/business tax Rs.10.22T and personal tax Rs.9.23T in FY24. India needs now GST tax reform without frequent changes in rates and multiple slabs.

As revenue revenue-neutral strategy, India should apply a 15% uniform GST rate across all goods and services including petroleum products. India’s CII has prescribed three slabs/rates for GST with the inclusion of petroleum products. The Indian government may further encourage a new personal income tax regime with some structural modifications and may even abolish the old tax regime from FY26.

In FY24, India’s total tax revenue was around Rs.55T against nominal GDP of around Rs.295T; i.e. almost 18.5%, which is at par with the global AE standard, despite only around 3% of people paying any personal income tax (despite heavy compliance tax network). This is because a vast majority of the population has very low income and need not pay any income tax at all. Also, there are various tax savings incentives, and thus government may streamline those incentives to collect a respectable income tax to reduce high GST/indirect taxes, which has also caused a higher cost of living over the past few years.

Although there is a rumor that from FY25, the Indian Federal Government may abolish the personal tax code and instead continue with direct/GST tax codes. However, the Government may abolish the old tax regime and keep the new tax regime with fewer tax slabs and without any tax deduction provisions related to investments.

But India also needs out-of-the-box ideas or monumental reforms in various aspects like labor & land reform (rather than a mere political narrative) for a developed economy by 2047-50 or even by 2100. India also has to strengthen institutional autonomy in the judiciary, press, election commission, competition commission, etc along with political funding and electoral process reform. India (Federal Government) now pays almost 45% of core tax revenue as interest on public debt and 35% on account of government salaries and pensions.

But India also needs out-of-the-box ideas or monumental reforms in various aspects like labor & land reform (rather than a mere political narrative) for a developed economy by 2047-50 or even by 2100. India also has to strengthen institutional autonomy in the judiciary, press, election commission, competition commission, etc along with political funding and electoral process reform. India (Federal Government) now pays almost 45% of core tax revenue as interest on public debt and 35% on account of government salaries and pensions. Indian Federal & state combined public debt & liabilities (PDL) is now around INR 275T, approaching 100% of the country’s nominal GDP.

Although most of the Indian PDL is in LCU (local currency units-INR), the cycle of higher deficits, debt devaluation and subsequent higher borrowing costs/higher inflation is making India a high-cost economy. This along with the lack of adequate employment opportunities for India’s huge pool of educated youths over the last few decades may create social unrest in the country, if not properly handled by the policymakers. Thus India needs to give RBI a dual mandate of maximum employment and price stability (like the US Fed).

Also, the Indian government may need a more personal tax collection system (like in the minimum payroll/social welfare taxes) along with non-strategic PSU disinvestments to fund modern social and traditional/transport infra in the country for ease of living. For this two main political parties (BJP and INC) should come into some bipartisan politics/economics supported by the corporate/business/ordinary public of the country.

Overall, despite incremental improvements in the last few decades, India is still far behind China in terms of infra (traditional, transport, and also social). Thus there is a huge scope for improvement for India’s ailing infra, especially railways and also education & healthcare to match with growing/huge demand for a huge/still growing population of almost 1.50B of the country.

India has now a natural economic growth of around 7-8% (real GDP) due to its large population and growing affluent middle class along with huge/growing government spending and service/IT/petroleum products exports. But India needs to grow in double digits (at least 10-12%) in real terms keeping USDINR and core inflation at manageable levels for the next 15 years to be able to become a true $5T economy with inclusive growths; not exclusive/K-Shaped and jobless growths like at present.

India needs to put proper tax and policy structures in place to encourage domestic manufacturing of quality goods for export so that it can compete with China and other Southeast Asian exports, which will eventually create mass employment (like in China). For all these, India needs lower borrowing costs for much higher private and public/government capex to improve the overall supply capacity of the economy along with manufacturing boost to become a developed economy by 2050-2100.

Thus looking ahead, despite the average total CPI being around +5.0% on average, RBI may go for rate cuts from Dec’24 as India’s average core CPI is now around +3.0%, while the average unemployment rate is around 8.0%. Although officially Modi government claims India’s unemployment rate is around 3.2% (??), perhaps at almost the lowest in G20 and the Indian economy is now at maximum employment amid the deluge of casual low-paid workers like SWIGY delivery boys! Indian Government/NSO should publish proper employment situation, core inflation, and retail sales data every month like in the US so that policymakers can make proper policy decisions for maximum employment and 3% price stability along with double-digit real GDP growth of at least around 10-12% for becoming the 3rd largest economy by 2050 in terms of real GDP at $5T.

India’s Dalal Street may be now looking for RBI Pivot to match with Fed/ECB/PBOC:

As per Taylor’s rule (modified), India’s longer-run terminal/neutral RBI repo rate should be around 4.00-4.50% to balance price stability (core CPI around 3.0%), maximum employment (95% of labor force) and adequate economic activity (real GDP growths at least +6.0%).

As the Fed has already started the latest rate cut cycle of 275/250 bps rate cuts over the next several quarters (Sep’24-Dec’26), RBI has to follow the Fed to keep interest rate/bond yield differential and FX rate (USDINR); RBI has to keep USDINR present equilibrium levels around 85-80; after unexpected Fed jumbo rate cuts of -50 bps and hawkish jawboning by RBI Governor Das, USDINR slips to a low around 83.46. Thus RBI has to cut in line with the Fed irrespective of any narrative; now USDINR is again hovering above 84 levels.

RBI officially indicated a change of stance in the Oct’24 MPC meeting and had gone for a dovish hold. But RBI may publish a report about targeting core inflation rather than total inflation/CPI, and may officially begin targeting core CPI from Dec’24 or Apr’25 MPC (new FY26). Thus RBI may start cutting rates by a -50 bps or -25 bps rate cut in Dec’24 depending upon the actual/likely Fed move. Thus RBI may also cut cumulatively 2.00-1.50% depending upon actual core inflation and Fed rate trajectory for a terminal repo neutral rate of 4.00-4.50% against Fed’s 3.00-2.75% by Dec’26.

At around 24500 Nifty and TTM EPS (Q1FY25) INR 873, the TTM PE is now around 28, which is still historically a bubble zone.

As per our calculation, FY24 Nifty EPS was around 855; assuming an average EPS growth of around +20% (in line with a current average of +18% for the last five years), the estimated FY25 EPS may around 1027 and with a fair PE of 20 (against average EPS growth of 18%), the fair value of Nifty should be around 20544 for FY25 (projected EPS 1027); 24653 for FY26 (projected EPS 1233), and 29583 for FY27 (projected EPS 1479). As the financial market usually discounts one year of EPS in advance, the current fair (neutral) value of Nifty should be around 20550 at a median PE of 20, while the bullish zone may be around 25700 and the panic (bear) zone may be around 15400. At present, Nifty should hover around the 25700/24000-23200/22600-21500/20500 zone (assuming the estimated Nifty EPS for FY25 is around 1027 and fair/bullish PE 20/22-25/28).

Conclusions:

Looking ahead, Nifty may correct further for various reasons:

·         Bubble zone valuation (TTM PE around 28); fair value zone may be now around 20-22

·         Still hawkish RBI; no indication of any rate cut even in Dec’24 as RBI generally does not give any specific forward guidance like Fed/ECB

·         Also if RBI does not follow Fed in rate cuts/easing, USDINR will depreciate more, which would be negative for export-heavy Nifty as almost 50% of Nifty EPS comes from export.

·         Growing concern of higher NPA amid lingering higher borrowing costs

·         Growing geopolitical tensions in the Middle East/Gaza/Lebanon/Yemen war with Israel; Iran may get involved directly; also growing Nuke narrative by Russia/Putin

·         China’s gain may be India’s pain after Chinese stimulus and a huge rally as short sellers get trapped.

·         Increasing political & policy uncertainty in Modi 3.0 minority government; no significant economic reform step so far in the first 100 days of Modi 3.0, which is now too pre-occupied with electoral politics, operation Lotus, and Foreign diplomacy; Modi may be now in the pre-retirement mood

·         India’s PM Modi may not be comfortable with coalition politics, falling popularity, and internal conflict within BJP/RSS over his arrogance and autocratic behavior.

·         Growing political uncertainty; Modi 3.0 may lose big in the forthcoming MH and JH elections in late 2024, followed by BR and DL.

·         Thus if Modi can’t consolidate his power in the forthcoming state elections (after the recent general election setback), he may have no other option but to opt for a face-saving early exit from active electoral politics by Dec’25 or even before on BJP’s 75-year mandatory retirement policy.

·         All is not good for Modi 3.0, which is now a minority government, now increasingly under various controversies from Adani/SEBI Chief (Butch)/ICICI Bank/ZEE involving in various regulatory and quid-pro issues.

·         Modi 3.0 is now also potentially being controlled by the whims & fancies of two key regional political parties (TDP and JDU & Co) despite ongoing ‘Operation Lotus’. This along with internal tussle within RSS/BJP along with state election issues in the coming months may keep Modi too much occupied with politics rather than economics.

·         Nifty may come under pressure on growing political & policy uncertainty/paralysis as Modi 3.0 is visibly weak (rollback government) and too busy with politics (against strong united opposition) rather than core economics.

·         Modi 3.0 is now pre-occupied with Operation Lotus strategy to stay in power and win in the forthcoming crucial five state elections with the leadership of PM Modi to consolidate his power within the party (BJP/RSS); otherwise, Modi may have to exit early Dec’25 with a suitable successor in place (Gadkari, Singh, and Shah)

·         Although Modi & Shah may try to stay in power after 2025 by calling a snap election under the ‘one nation, one election’ policy (if Modi 3.0 can pass it through LS and RS), it may be difficult for Modi as there is now no ‘Modi wave’

·         But at around 24500 and projected TTM (Q2FY25) EPS around 917, the projected Nifty TTM PE maybe around 22, at a reasonably fair valuation.

·         All focus may be now on India’s MH state and US election along with the earnings report card for Q2FY25.

·         If BJP/NDA wins the MH election (very low probability), it may be positive for Indian market sentiment.

·         If Trump indeed wins the US Presidential election (as per US betting odds, which may be also manipulated), it may be negative for EM/China/India and even Europe and the US market for Trump trade war tantrum 2.0

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the fundamental narrative, technically Nifty Future/ India 50 CFD (24575) has to sustain over 244450 for any rebound to 24700/24900-25200/254450* and further rally to 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 24400, India 50 may further fall to 24050/23950*-23800/23550-23450/23350 and further to 23000/22850-22500/22150 in the coming days.