Nifty slips from synchronized global easing high led by banks

·         At around 26200 Nifty and TTM EPS (Q1FY25) INR 873, the TTM PE is now above 30, which is historically a bubble zone

·         Due to lower/fair valuation, FPIs may now also increase their exposure to the Chinese market amid stimulus and also huge short covering (China’s gain, India’s pain)

·         Anticipated RBI rate cuts may be negative for banks & financials as NII, NIM may be affected

·         Modi 3.0 may lose heavily in not only the HR state election but also in J&K,  MH, JH, DL, and even BR

·         In that scenario, Modi may have to take a graceful exit from electoral politics by Dec’25 or even before on BJP’s 75-year retirement policy; Gadkari may be the next BJP/RSS PM candidate

India’s benchmark stock index, Nifty closed around 26178.95 Friday, edged down --0.14 % after stumbling from another fresh life time high (LTH) 26277.35; overall Nifty jumped almost +3.74% for September amid synchronized global easing on both sides of Atlantic as-well as Pacific (Fed-ECB-PBOC); also BOJ refrained from further normalization (hikes) in September. Nifty gained almost +15% since June’24 and almost 5000 points from the Indian election result day panic low around 21281.45 to the latest LTH 26277.35; i.e. almost +23.50% on hopes & hypes of political & policy stability and ‘blockbuster economic reforms’ even under ‘weak’ Modi 3.0.

In Sep’24, Wall Street Futures led by DJ-30 and SPX-500 scaled a new life time high (LTH) after the Fed’s surprising jumbo rate cut of -50 bps and hopes & hopes of bigger Fed pivots/rate cuts in the coming days. But tech-savvy NQ-100 underperformed to some extent due to the growing tech war between the US and China (domestic political compulsion ahead of the US election). But US, German, European, and Asian stocks, Metals, and even oil were also boosted by China's mini-stimulus (monetary and fiscal) as China, being the 2nd largest economy and having one of the biggest consumption powers, matters to almost all major MNCs of the world.

The latest PBOC stimulus plan is intended to boost not only real estate but also the overall economy from years of slumber, especially after the Trump trade war tantrum followed by the COVID conspiracy. The Chinese economy may be now suffering from excess capacity, lower demand, and a subsequent deflation-like scenario. Export-heavy China is suffering from weak global demand/trade and also subsequently subdued domestic demand, resulting in abnormally lower inflation or deflation-like scenarios.

China has ramped up the rollout of policy initiatives this week, with its top decision-making body, the Politburo, pledging to introduce further fiscal and monetary support measures to prevent further deterioration of the economy. Subsequently, Chinese stocks, which had been underperforming Wall Street for a long, joined the bandwagon for a synchronized global rally amid synchronized global easing. Chinese stock market soared to a 12-month high and had the best week since 2008. Chinese stock market may also soon scale a fresh life time high in line with global peers amid a global easing boost. There would be multiple rate cuts by the Fed, ECB, BOE, and other major G20 Global central banks. However Chinese monetary and fiscal stimulus might be measured, targeted, and limited in nature.

Now the focus is from from FED/ECB/PBOC to India’s RBI, whether RBI will relent and finally signal rate cuts (easing) from the Oct’24 meeting and start the multiple rate cuts from Dec’24 in line with Fed? However, RBI/Governor Das is still maintaining a hawkish hold stance as India’s headline CPI is still hovering around +5.00% on average, while GDP growth is still robust above +7.0% against RBI/trend rate +6.0%. But at the same time, India’s unemployment rate continues to hover around 8.0% on average, while core inflation is well below +4.0% targets. Thus practically RBI should now opt for a policy change stance and start rate cuts.

Like Wall Street, India’s Dalal Street now may also be expecting similar RBI rate cuts from Dec’24. RBI may also officially shift its stance from present restrictive to neutral in Oct’24 as the Fed indeed starts cutting rates from Sep’24 with an unexpected -50 bps instead of normal -25 bps. Recent RBI/Governor Das comments indicate RBI may not cut until the Fed starts cutting and for that RBI will observe the Fed’s real action, not any forward guidance/jawboning. If by Dec’24, India’s headline CPI remains sticky around +5%, then RBI may also change its inflation targeting stance to core inflation (at least unofficially with a word of caution).

As per RBI Governor Das, the Fed is confusing the market more by going for such frequent and needless jawboning, often contradictory to each other. Perhaps, RBI Governor Das is not entirely wrong and thus RBI has now fully stopped providing any forward guidance, which may confuse the market more. RBI has also not any intention for any artificial YCC despite the government being the largest borrower; the Indian government is also the largest lender being the main promoter/largest shareholder of all PSU Banks (PSBs)

Thus India’s Federal government is also one of the big beneficiaries of higher interest rates in India. RBI is the big beneficiary of higher government bond yields as RBI is the largest holder of government bonds (debts). In turn, the Government is getting a hefty return/dividend from RBI and also almost all PSU Banks. Thus Government/RBI may not be in favor of a lower interest rate regime in India as it will eventually affect the NII/NIM/portability of PSBs and ultimately shareholders' lucrative return to the government.

But the Indian economy now desperately needs lower interest and a lower tax regime (at least indirect tax) for higher/maximum employment and also durable price stability. India needs lower borrowing costs, lower indirect taxes, and appropriate policies to encourage manufacturing, private, and also government capex to increase the overall supply capacity of the economy to match growing demand due to the huge/increasing population and rising middle-class income.

Talking about India’s inflation, the MOSPI data shows India’s annual (y/y) total CPI (inflation) increased by +3.7% in Aug’24 from +3.6% sequentially, above the market consensus of +3.6%, and the remains around the slowest increase since Aug’19 and officially fell well below RBI’ target of +4.0% for the 2nd  consecutive time in the last five years (since Jan’19) primarily due to favorable base effect and led by a drastic fall in food and fuel prices.

In Aug’24, India’s total CPI was boosted by a slightly higher cost of food & beverages, while dragged by fuel & light and housing inflation was almost flat.

On a sequential (m/m) basis, India’s total CPI was unchanged in Aug’24 from the prior month.

Derived data shows, India’s annual core CPI was unchanged around +3.4% in Aug’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 excess supply capacity than demand.

Overall, India’s 6M rolling average (6MRA) of CPI inflation was around +4.5% in Aug’24 against +4.7% in the last report. The 2024-YTM average CPI was around +4.6% in Aug’24 against +5.7% in 2023, while the 6M rolling average of sequential (m/m) CPI was +0.6%. India’s 6M rolling average of core CPI was around +3.2%, while the same for the unemployment rate was around 8.2% (Aug’24).

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.

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

Also, structurally higher fiscal deficit, higher debt, higher money printing, and devaluation of currency are causing rampant inflation. Higher fiscal spending is also causing widespread corruption at almost all levels, especially in the political system as a recent Electoral Bond scam shows (cut money/donations to political parties/governments for getting contracts).

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.

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, 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 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 products & 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% or even 10% uniform GST rate across all products 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. India’s total tax revenue is now around Rs.35T against nominal GDP of around Rs.325T; i.e. almost 11%, which is at par with the global AE standard, despite only around 3% of people paying any personal income tax despite heavy compliance 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. 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’s slow train speed along with long waiting lists (3-4 months) for train tickets in the busy traveling/holiday season has still been a big issue for the last few decades indicating that railway transport infra is still significantly inadequate to the growing demand of the population/economy; the same is now also almost true for airways.

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 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 2/3% 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 $5T.

 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.

RBI may officially indicate a change of stance in the Oct’24 MPC meeting and go for a dovish hold followed 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 26200 Nifty and TTM EPS (Q1FY25) INR 873, the TTM PE is now above 30, which is 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 maybe 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).

Conclusions:

Looking ahead, Nifty may correct for various reasons:

·         Bubble zone valuation (TTM PE around 30)

·         Although Fed and RBI rate cuts may be positive for global as well as local stock markets, it’s maybe already discounted to a large extent.

·         Central Bank rate cuts/RBI rate cuts would be negative for banks & financials as it would affect NIM/NII and overall earnings, although partly positive for higher bond prices (HTM bond portfolio, especially for PSBs); as almost 40% of Nifty earnings comes from banks & financials, Nifty earnings (EPS) may not grow by +20% in FY26.

·         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 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.

·         Modi 3.0 is set to lose big in the forthcoming HR election and also may face difficulties in Jammu this time along with another washout in Kashmir; the election will be held on 5th October in a crucial HR state.

·         Modi 3.0 may also 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’

·         Modi 3.0 may even launch a surgical strike against Bangladesh/Pakistan/POK to ‘reinstall democracy’ to gain in an election.

·         The Indian stock market may not be yet discounted for such scenarios and may correct meaningfully from 26000 levels.

Market wrap:

On Monday, India’s Nifty Future slumped over 1% due to suspected FPI outflows from India to China amid better PE valuations (China’s gain, India’s pain); also banks & financials dragged as RBI rate cuts may be negative for the sector/lending model (lower NIM/NII).

On Monday, Nifty was dragged by RIL (after the bonus share record date), ICICI Bank, HDFC Bank, AXIS Bank, INFY, M&M, Bharti Airtel, SBIN, Trent and Tata Motors, while boosted by NTPC, JSW Steel, Tata Steel, and Hindalco as metals got a boost on Chinese stimulus; Indian steel manufacturers may be also benefited by less Chinese dumping in India.

Overall, Nifty gained around +2.28% for September boosted by HDFC Bank, ICICI Bank, Bharti Airtel, M7&M, Axis Bank, Bajaj Finance, Bajaj Auto, Bajaj Fin Service, ITC, HUL and RIL, while dragged by Tata Motors, TCS, ONGC, SBIN, Coal India and DRL. India’s Dalal Street was boosted by metals, realty, FMCG, Automobiles, Banks & Financials, media, infra, energy and pharma, while dragged by PCU banks, techs, and PSE (Public Sector Enterprises).

Technical trading levels: Nifty/India 50 Future/CFD

Whatever may be the narrative, technically Nifty Future/ India 50 CFD (25990) now has to sustain over 26300 for any rebound to 26400/26600-26800/27200* in the coming days; otherwise sustaining below 26250-26000, may again fall to 25800/25600-25500/25200 and further 25000/24900-24600/24300 and 24000/23700-23300*/23000 and further to 22800/22600*-22300/21800/21300* and further to 21150/21000*-20400/20000* in the coming days.

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