Sensex, Nifty charts (Mar 27, 2020): short covering rallies after touching 3 year lows

FIIs eased up on their huge selling spree. They were net sellers of equity on the first four trading days, but were net buyers on Fri. Mar 27. Their total net selling was worth Rs 71.65 Billion. DIIs were net sellers of equity on Thu. Mar 26, but were net buyers on the other four days. Their total net buying was worth Rs 43.08 Billion, as per provisional figures.

RBI resorted to out-of-turn interest rate cuts in a desperate bid to stop the economy from sliding further. The Repo rate was cut by 75 bps (0.75%) to 4.4%, which is lower than its previous low of 4.74% in Apr '09. 

The Reverse Repo was cut by 90 bps (0.9%) to 4%. The CRR was cut by 100 bps (1%) to 3%, which is likely to inject Rs 1.4 Trillion into the banking system. The move is expected to encourage banks to lend more.

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex dropped to touch a new 3 year low of 25639 on Tue. Mar 24 before embarking on a sharp and swift short-covering rally. The index touched an intra-day high of 31126 on Fri. Mar 27, but formed a 'reversal day' bar (higher high, lower close).

Sensex is correcting the 11 year gain of some 34000 odd points from the Mar '09 low to the Jan '20 top. A 50% Fibonacci retracement is expected to drop the index to about 25100. Tuesday's low came within 500 points of this critical level. 

Daily technical indicators are in various stages of correcting oversold conditions. MACD turned up inside its oversold zone, but is facing resistance from its falling signal line. RSI has emerged from its oversold zone, but its upward momentum has stalled. Slow stochastic has risen sharply towards its overbought zone, hinting at an end to the short-covering rally.

Sensex corrected 16600 odd points from its Jan 20th top to its Mar 24th low. A 38.2% Fibonacci retracement of the fall can take the index to about 32000. The falling 20 day EMA is at 32200. The zone between 32000-32200 will be a tough resistance to cross for the index.

Small investors with no experience of the 2008 bear market would do well to refrain from chasing the rally. Sensex may fall further before a recovery in the stock market and the economy can happen. It will be a slow grind upward taking several months - may be even a year or two.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty bounced up sharply after touching a new 3 year low of 7511, but closed well below its 200 week EMA for the third straight week. The 20 week EMA crossed below its 50 week EMA for the first time in 3 years, and both weekly EMAs are falling. The 200 week EMA is beginning to turn down.

The long-term bullish structure of the chart has been wrecked by bears. FIIs have pulled out more than Rs 580 Billion from their equity holdings during the month, and are expected to continue with their exit strategy.

Weekly technical indicators are looking bearish and oversold. MACD is falling inside its oversold zone. RSI is also falling inside its oversold zone. Slow stochastic has bounced up a bit from the edge of its oversold zone. Last week's short-covering rally should end soon. 

After touching a low of 17.15 on Mon. Mar 23, Nifty's TTM P/E moved up to 19.52, which remains above its long-term average. The breadth indicator NSE TRIN (not shown) dropped sharply into its neutral zone, where it has been treading water. Any further rally may be short-lived.

Bottomline? Sensex and Nifty charts have closed well below their respective 200 week EMAs for the third straight week - signalling the start of long-term bear markets. RBI's desperate interest rate cuts are too little too late to trigger economic growth that has been decimated by the virus lock-down. Small investors should continue with their SIPs, while waiting patiently for the correction to play out.

Sensex, Nifty charts (Jun 07, 2019): pause after touching new highs

During a holiday-shortened trading week, FIIs were net buyers of equity on Mon. Jun 3, but net sellers on Tue., Thu. and Fri. (Jun 4, 6, and 7). Their total net buying exceeded Rs 7.2 Billion. DIIs were net buyers of equity on Fri. Jun 7, but net sellers on the other three days. Their total net selling was worth Rs 12.9 Billion, as per provisional figures.

Nikkei India's Manufacturing PMI increased to 52.7 in May '19 from 8-months low figure of 51.8 in Apr '19 - remaining above 50 (indicating growth) for the 22nd month in a row. 

However, Nikkei India's Services PMI slipped to 50.2 in May '19 from 51 in Apr '19 - its slowest growth in a year. The Composite PMI (Manufacturing + Services) was 51.7 in May '19 - the same as in Apr '19.

Passenger vehicle sales in India declined 21.6% YoY in May '19 due to high finance costs and economic uncertainty. Monthly sales for Maruti, Tata Motors, Honda, Toyota declined between 7.5% to 38%. M&M sales were marginally lower. 

BSE Sensex index chart pattern

The daily bar chart pattern of Sensex gained more than 550 points on the back of heavy FII buying on Mon. Jun 3. The index rose further to touch a new high of 40312 on Jun 4, but formed a small 'reversal day' bar (higher high, lower close) due to profit-booking before the Eid holiday.

A 25 bps (0.25%) cut in repo and reverse repo rates by the RBI Governor on Thu. Jun 6 had already been 'discounted' by the market. Downward revision in the GDP growth rate led to profit booking by both FIIs and DIIs. Sensex lost 550 points.

The index bounced up after receiving support from its rising 20 day EMA on Fri. Jun 7, and formed a 'reversal day' bar (lower low, higher close) that brought some relief for bulls. The index is trading above its three EMAs in a bull market.

Daily technical indicators are in bullish zones after correcting overbought conditions. MACD is falling towards its rising signal line. ROC has crossed below its 10 day MA and dropped from its overbought zone. RSI and Slow stochastic have slipped down from their respective overbought zones. 

All four technical indicators showed negative divergences by failing to touch new highs with the index on Jun 4. Some more correction, and a part or complete filling of 'Gap 2' (formed on May 20) will improve the technical 'health' of the chart and enable Sensex to rise higher.

The NBFC debt mess continues, with DHFL being the latest defaulter after IL&FS. Remember Buffett's quote: "There's never just one cockroach in the kitchen." Several mutual funds, PSU and private banks have large outstanding loans to both NBFCs.

Expect the problem to get worse before it gets better. Banks are very wary of loaning money to NBFCs. Some of the smaller NBFCs will die. Others will be forced to borrow overseas just to survive - and will get into bigger trouble. 

Easy finance fuelling India's consumption growth is a thing of the past. Manufacturing growth has been weak for a while. For the next few quarters, earnings growth for Indian companies may not improve much. 

Don't get fooled by the high index level into thinking all is well. No need to sell off in a panic. Remain cautiously optimistic. Maintain trailing stop-losses. Avoid bargain-hunting when Sensex is near a lifetime high.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new high of 12103, but formed a 'reversal' bar (higher high, lower close) due to profit booking by FIIs and DIIs.

Three of the weekly technical indicators - MACD, RSI, Slow stochastic - are inside their respective overbought zones, but only Slow stochastic is showing some upward momentum. ROC is falling below its 10 week MA towards neutral zone. 

All four indicators showed negative divergences by failing to touch new highs with the index. Some more correction or consolidation is likely. 

After touching a high of 29.90 on Mon. Jun 3, Nifty's TTM P/E has moved down to 29.39, which is well above its long-term average in overbought zone. The breadth indicator NSE TRIN (not shown) has risen sharply to the edge of its oversold zone, hinting at some near-term index upside.

Bottomline? Sensex and Nifty charts are consolidating near lifetime highs, as bulls have not been able to shake off tenacious bears. A weakening economy and debt crisis of NBFCs will be detrimental to earnings growth of India Inc. Stay invested with trailing stop-losses. Avoid bargain hunting near lifetime highs.

Nifty chart: a midweek technical update (Aug 01, 2018)

FIIs were net buyers of equity on Tue. Jul 31, but net sellers on Mon. Jul 30 and today. Their total net buying was worth Rs 2.4 Billion. DIIs were net buyers of equity on Mon. and net sellers during the next two days. Their total net selling was worth Rs 8 Billion, as per provisional figures.

At the end of the three-day Monetary Policy Committee meeting, RBI hiked repo rate and reverse repo rate by 25 bps (0.25%) each today. The move was widely expected. Nifty closed just 10 points lower today after four straight days of rallying higher.

Revenue collection from GST rose to Rs 965 Billion in Jul '18 from Rs 956 Billion in Jun '18, thanks to increased compliance. However, it fell short of the Rs 1 Trillion per month target set by the government.

The daily bar chart pattern of Nifty touched a new high every day for five straight trading days. However, it closed lower today to form a small 'reversal day' bar (higher high, lower close).

All three EMAs are rising, and Nifty is trading above them, and above the (blue) up trend line, in a bull market. The index is in 'blue sky' territory with no known resistances.

Daily technical indicators are inside their respective overbought zones. MACD is rising above its signal line. ROC is above its 10 day MA, but has stopped rising. RSI and Slow stochastic are showing signs of correcting overbought conditions.

Nifty's TTM P/E has moved up to 28.14 - which is much higher than its long-term average and in overbought zone. The breadth indicator NSE TRIN (not shown) is oscillating just above its overbought zone. Expect some index consolidation or correction.

The index rally during the past 4 months has not been broad-based. A few large-cap stocks have propelled the index higher. Mid-cap and small-cap stocks have undergone profit booking, but their valuations still remain high.

If the index undergoes a correction - which is quite possible after a sharp rally - the mid-cap and small-cap stocks may correct even more. Any rally in mid-cap or small-cap stocks from here on can be used for partial profit booking.

Nifty chart: a midweek technical update (Jun 06, 2018)

FIIs were net buyers of equity on Mon. Jun 4 but net sellers during the next two trading days this week. Their total net buying was worth Rs 21.1 Billion. DIIs were net sellers of equity on Mon. Jun 4 but net buyers during the next two trading days. Their total net buying was worth Rs 4.7 Billion, as per provisional figures.

Rising rural demand and government's infrastructure push propped up sales of 2-wheelers and CVs in May '18. Tata Motors, Ashok Leyland, Bajaj Auto, Royal Enfield, Hero Moto, Maruti, Escorts, M&M showed double-digit sales growth.

RBI announced 25 bps (0.25%) increase in repo and reverse repo rates after a 3-day policy meeting today. Increase in interest rates occurred after 4.5 years. The stock market had anticipated the news, and rose on short covering and some value buying.

The daily bar chart pattern of Nifty is continuing to struggle in its efforts to cross above the downward 'gap' formed back in Feb 5.

On three consecutive trading days - May 31, Jun 1, Jun 4 - the index moved above the 'gap' intra-day, but failed to close above it. 

Nifty dropped to close below its 20 day EMA on Jun 4 and dropped further below its 50 day EMA intra-day on Jun 5, but pulled back towards the 'gap' today.

Daily technical indicators are looking neutral to bullish. MACD is entangled with its signal line, and moving sideways in bullish zone. RSI is just above its 50% level in neutral zone. Slow stochastic is trying to move up above its 50% level. Expect bears to resume selling at any time.

Nifty's TTM P/E is at 27.06 - which is much higher than its long-term average. The breadth indicator NSE TRIN (not shown) is inside its overbought zone, and may limit near-term index up side.

The activity in the primary markets is set to pick up after a period of lull. More than half a dozen companies are looking to tap the market with their initial public offerings (IPOs) worth a cumulative Rs 200 Billion. That will divert cash from the secondary market.

Oil prices have come down a little, but may go up again post OPEC's meeting on Jun 22. The consolidation-cum-correction below the (purple) down trend line is likely to continue. A fall below the May 23 low of 10418 can lead to a test of support from the rising 200 day EMA.

Nifty chart: a midweek technical update (Aug 02 ‘17)

For the month of Jul '17, FIIs were net buyers of equity (worth Rs 14.6 Billion) after three straight months of net selling. DIIs were also net buyers of equity (worth Rs 47.8 Billion) for the 4th month in a row. Nifty had its first ever monthly close above the 10000 level.

Passenger vehicle sales picked up in Jul '17 - thanks to price cuts after GST implementation. Maruti (22.4%), Honda (21.7%), M&M (21%), Ford (18.9%), Tata Motors (10.2%), Toyota (43%) showed double-digit sales growth over Jun '17. Two-wheeler and Commercial vehicles also had good growth in sales. 

In a widely expected move, RBI cut both the repo and reverse repo rates by 25 bps (0.25%) each during today's monetary policy meeting. Nifty corrected 33 points, as the interest rate cut had already been 'discounted' by the market.

The daily bar chart pattern of Nifty touched a new high of 10138 prior to RBI's policy announcement, but slipped 56 points to close at 10082 - forming a 'reversal day' bar (higher high, lower close) that may temporarily halt the bull rally.

The index is trading well above its three rising EMAs in a bull market. All three daily technical indicators are in their respective overbought zones. Slow stochastic is showing negative divergence by touching consecutive lower tops.

The index is almost 950 points above its 200 day EMA - a sign of extremely overbought condition. Nifty's TTM P/E is at 25.63 - considerably higher than its long-term average. The breadth indicator NSE TRIN (not shown) is trying to emerge from deep inside its overbought zone.

In the near term, large liquidity flows can keep an index overbought for long periods. Eventually, there will be a correction if earnings fail to catch up with index levels. Aug '17 may well turn out to be a month of correction or consolidation. 

Stay invested. Maintain SIPs. But no need to go on a buying spree just because the index is touching new highs. Partial profit booking may be a better idea.

Sensex, Nifty charts (Apr 07, 2017): 'Trump'ed-up corrections or technical weakness?

Activity remained muted in a holiday-shortened trading week. FIIs were net buyers of equity worth Rs 7.55 Billion; DIIs were also net buyers of equity worth Rs 0.48 Billion, as per provisional figures. Sensex and Nifty gained marginally on weekly closing basis.

Nikkei India Services PMI rose to a 5 month high of 51.5 in Mar '17 against 50.3 in Feb '17. A figure above 50 indicates expansion. "(India’s) rapid recovery from the demonetisation-related downturn was accompanied by job creation and softer inflationary pressures.”

To check excess liquidity in the system, narrow down money market rates and control inflation in FY18, RBI on Thu. Apr 6 increased the reverse repo rate by 25 basis points to 6% from 5.75% earlier.

BSE Sensex index chart pattern

The following were concluding comments in last week's post on the daily bar chart pattern of Sensex: "Announcement of FY 16-17 corporate results is expected to start in about two weeks. Some hesitation among bulls is only to be expected till then."

On Apr 5, the index rose to touch a new 52 week intra-day high of 30007 - testing, but falling just short of, the lifetime intra-day high of 30025 touched in Mar '15. Sensex ended the day at a lifetime closing high 29974.

Three of the four technical indicators - MACD, ROC, RSI - showed negative divergences by touching lower tops. That was a signal for a corrective move. Trump's cruise missile barrage at a Syrian airport exacerbated the index slide.

Note that the index closed just below trend line 2 - within the 3% 'whipsaw' limit, but it should be treated as a second warning about a possible trend change. (The first warning was a close below trend line 1.)

Sensex has formed a small 'rising wedge' pattern from which the likely break out is downwards. It is also possible that the index has formed the left shoulder and head of a 'head and shoulders' reversal pattern.

The index is trading above its three EMAs in a bull market, but is more than 2000 points above its 200 day EMA (an empirical observation of an overbought condition). Daily technical indicators are showing downward momentum. Some more correction or consolidation may follow.

NSE Nifty index chart pattern

The weekly bar chart pattern of Nifty touched a new high of 9274, but closed at 9198. For the 4th straight week, the index failed to close above the psychological level of 9200.

The index is trading well above its two rising weekly EMAs in a bull market. All four technical indicators are inside their overbought zones. ROC is showing signs of bearishness by crossing below its 10 week MA.

Nifty's TTM P/E remained above 23 during the week - well above its long-term average. The breadth indicator NSE TRIN (not shown) is rising in neutral zone - hinting at more consolidation or correction.

India's manufacturing and services PMI numbers are showing growth. Whether that growth will get reflected in India Inc's Q4 numbers or not may be keeping bulls on tenterhooks.

Bottomline? Sensex and Nifty charts are consolidating after sharp rallies triggered by hopes of better corporate earnings. Both indices are looking overvalued. Some more consolidation or correction is possible. Don't be in a rush to buy or sell. Try to look at the big picture.

Nifty chart: a midweek technical update (Feb 08 ‘17)

Contrary to market expectations, the RBI Governor kept repo and reverse repo rates unchanged at today's policy meeting. However, he has made it clear to banks that there was enough room to further reduce lending rates.

Cash withdrawal limits from savings accounts will be raised to Rs 50,000 per week effective Feb 20. From Mar 13 onwards, withdrawal limits will be removed completely. Nifty recovered intra-day losses to close flat.

FIIs turned net sellers of equity worth Rs 3.3 Billion during the first three days of trading this week. DIIs were net buyers of equity worth Rs 19 Billion, as per provisional figures.

The daily bar chart pattern of Nifty formed an upward 'gap' and scaled the 8800 level on Mon. Feb 6 - gaining more than 900 points from its Dec '16 low. It has since slipped down a little, and filled Monday's upward 'gap'.

Uncertainty about the RBI policy meeting had led to some profit booking. The index appears ready to move up to test its Sep '16 top 8969.

All three EMAs are rising, and the index is trading above them in a bull market. Technical indicators are looking overbought. Some more correction or consolidation is likely.

Nifty's TTM P/E is at 23.28, which is well above its long-term average. The breadth indicator NSE TRIN (not shown) remains deep inside its overbought zone.

Remember that an index can remain overbought for long periods. The strategy to make money in a bull market is to buy the dips - which bulls are clearly following.

Nifty is approaching its lifetime high - touched back in Mar '15. Expect serious profit booking around the psychological level of 9000.

(Note: There will be no blog posts for the next few days. Planning to take a short break from the market to commune with nature at a reserve forest with no electricity and no Internet.)

Nifty chart: a midweek technical update (Oct 05 '16)

FIIs were net buyers of equity worth Rs 6.20 Billion during the first three days of trading in Oct '16. DIIs were net buyers on Mon. but turned net sellers thereafter - their total net selling in equity was worth Rs 3.20 Billion, as per provisional figures.

India's manufacturing activity slipped in Sep '16 as per Nikkei's Manufacturing PMI of 52.1 against 52.6 in Aug '16. The Services PMI dropped to 52 in Sep '16 against 54.7 in Aug '16. However, both figures were above 50, indicating growth.

In the monetary policy review on Oct 4, RBI's new Governor surprisingly cut repo and reverse repo rates by 25 bps (0.25%), leaving CRR unchanged. The news should have boosted bullish sentiment in the market but didn't.

In last week's post on the daily bar chart pattern of Nifty, a 'descending triangle' pattern was drawn with the support level at 8690. Surgical strikes by the Indian Army on terrorist camps across the Line of Control in J&K triggered a sharp fall below 8690 on Thu. Sep 29.

The index found good support at 8550, and the subsequent rally took the index above its 20 day and 50 day EMAs to an intra-day high of 8807 today. But it faced strong resistance from the blue downtrend line and dropped to seek support from its 20 day EMA.

The 'descending triangle' pattern has been redrawn - with the support level now at 8550 and a downward target at 8130. Between 8550 and 8130 are 'Runaway Gaps 2&3' and the rising 200 day EMA at 8250.

A likely breach of 8550 should lead to a filling of 'Runaway Gap3' but Nifty may find support from 'Runaway Gap2'.

Nifty closed above its three EMAs in bull territory today. But the bearish reaction to an interest rate cut and the formation of a reversal pattern means that bears have the upper hand in the near term.

Daily technical indicators are giving conflicting signals. MACD is below its falling signal line and just managed to remain in positive zone. RSI is seeking support from its 50% level. Slow stochastic has moved above its 50% level. Expect the index to consolidate within the redrawn 'descending triangle' for a while.

Nifty's TTM P/E remains well above its long-term average at 23.43. The breadth indicator NSE TRIN (not shown) is in neutral zone and moving down towards its overbought zone.

An upward breach of the 8800 level with good volume support can negate the 'descending triangle' pattern. The probability of that happening in the near term is low.

The longer term structure of the chart is bullish. Any correction should be used as a buying opportunity.
  

Nifty chart: a midweek update (Jun 08 '16)

A  delayed monsoon and an upside risk to CPI inflation were the probable reasons why the RBI Governor kept repo, reverse repo and CRR rates unchanged during yesterday's policy announcement.

Though the move was widely anticipated by economists and market experts, bulls treated it as 'no news is good news' and went on a buying spree. 

In the three trading days this week, FIIs have been net buyers of equity worth Rs 1050 Crores. DIIs were net sellers of equity worth Rs 440 Crores.

Passenger vehicle sales in May '16 rose 7.6% over May '15, against a YoY growth of 11% in Apr '16. Maruti, Hyundai, M&M, Ford and Renault showed good growth. Honda, Tata Motors, Volkswagen and Nissan showed decline in sales.

The daily closing chart pattern of Nifty shows a 3-step recovery from a 15 months long down trend after formation of a 'double bottom' reversal pattern in Feb '16.

Step 1 was a sharp rally during Mar '16 that faced strong resistance from the 200 day EMA. Step 2 was a 8 weeks long sideways consolidation within a 'symmetrical triangle' pattern.

Step 3 was a sharp upward breakout from the triangle into bull territory, followed by the 'golden cross' of the 50 day EMA above the 200 day EMA that technically confirmed a return to a bull market.

A 'doubting Thomas' may point out that Nifty has gained only 18.7% from its Feb 25 '16 closing low of 6971, whereas a 20% gain is required to confirm a bull market.

Also, the index is yet to close above the long-term resistance level of 8275, though the level was breached intra-day two days in a row.

But these may appear to be nothing more than technical nitpicking. The chart is firmly in the grip of bulls. All three EMAs are rising and the index is trading above them.

Does it mean that the index will continue to rally without a correction? Obviously not. 

All three technical indicators are in their overbought zones following the sharp rally after the upward breakout from the triangle. The breadth indicator, NSE TRIN, has dropped back inside its overbought zone.

A correction or consolidation may be around the corner.

A chart can look overbought for long periods during a bull market. Should you now chase the rally? Prudence requires waiting for a dip to enter/add.

A few market analysts have mentioned substantially lower levels for Nifty due to high valuations and global uncertainties. You should ignore them.

But don't throw caution to the wind. Do not try to short the index. If you decide to buy, pay attention to your asset allocation plan and maintain a suitable stop-loss.

Nifty chart: a midweek update (Apr 06 '16)

The RBI Governor cut the repo rate by 25 bps (0.25%) to 6.5%. The move was widely expected and already discounted by the stock market, as per analysts. So, what was the reason for the big sell-off?

It was a classic case of 'sell on news' - led by FIIs. They were net sellers of equity worth Rs 800 Crores on Tue. Apr 5, and Rs 500 Crores today. Probably just routine profit booking after massive buying last month.

Adrian Mowat of JP Morgan Chase believes that measures to increase liquidity in the system by Dr Rajan - like increasing the reverse repo rate by 25 bps to 6%, cutting MSF by 75 bps to 7%, announcing OMO of Rs 15,000 Crores - will be game changers.  

In an earlier post on the 1 year closing chart pattern of Nifty, the importance of the 'support-resistance' level of 7550 was explained.

It is interesting to note how 7550 is continuing to play an important role. The index broke out above 7550, but pulled back - only to bounce up again.

It faced strong resistance from its sliding 200 day EMA and pulled back towards 7550 for a second time. The index is also receiving support from its 20 day EMA.

The two dips provided good opportunities to add/enter. Can Nifty fall some more? Sure it can, specially if FIIs continue to sell. Expect the 7550 level and the rising 50 day EMA to provide support on the downside.

Daily technical indicators have corrected overbought conditions and showing downward momentum, but remain in bullish zones. Since the beginning of Mar '16, bulls have been buying every dip - and may continue to do so.

Nifty is still trading below its 200 day EMA in bear territory. On longer-term weekly chart (not shown), the index has dropped to seek support from its 20 week EMA but closed almost 500 points above its 200 week EMA in a long-term bull market.

The near-term trigger for the market will be declaration of Q4 (Mar '16) results from next week. It is unlikely that India Inc. will show much improvement from Q3 (Dec '15) results.

Stock picking will take centre stage - so be careful about what you buy. If you are not sure, buy units of a good large-cap or balanced mutual fund with a proven track record.

A convincing move above 8000 will be the first indication that bulls are regaining control.

Is the stock market rallying only on hopes of a repo rate cut? - a guest post

Sensex and Nifty had touched lifetime highs in Mar '15. A year-long correction led to both indices touching 52 week lows on Feb 29 '16 - losing 25% from their Mar '15 tops.

The stock market did a sudden volte face from the beginning of Mar '16 - as bears (i.e. FIIs) turned bulls and bulls (i.e. DIIs) became bears. What triggered the abrupt change in sentiment?

Was it belated awareness of market players that the global economy was not doing as badly as they thought? Did FIIs get encouraged by the governments decision of sticking to its fiscal deficit targets? Or, was it a mix of both? 

In this months guest post, Nishit argues that expectation of a repo rate cut by RBI in its policy meeting on Apr 5 '16 may be the real reason for the current market rally.

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The Government recently slashed interest rates on Small Savings, thereby dealing a very big blow to Senior Citizens who depend on interest income. Postal Saving Schemes have suffered big cuts. The whole idea was to bring interest rates in line with Bank Fixed Deposit rates and thus make it a level playing field for banks.

The Government should have excluded special schemes - like the Senior Citizen Savings Scheme and the Girl Child scheme - which were specifically targetted at financially vulnerable sections of the population.

The Government has also committed to stick to its fiscal stability road map. With inflation under control, this has set the stage for a 25 basis point (0.25%) rate cut in the RBI policy meeting on April 5th. Optimists are expecting a 50 basis points (0.5%) rate cut.

Reduced Fixed Deposit interest rates are going to put a lot of people in difficulties - especially those who have retired and depend on Fixed Income.

Repo and Reverse Repo rates are most likely to be reduced by 25 basis points now and 25 basis points in June, depending on the progress of the Monsoon. The markets have rallied based on this. The 10 year Government Bond is trading at an yield of 7.51%, which is the lowest in past several years.

The Government will have to kick start several infrastructure projects if demand has to be generated. Only slashing interest rate is not enough. Road projects are a prime example.

Cheap funds for the banks to lend out are just one aspect. What the Government is ignoring is the social aspect as well of welfare schemes.

A stock market rally based only on expectations of an interest rate cut is a temporary phenomenon. Unless backed by pickup in demand and increased Government spending, the rally will fizzle out.

The Government is helping the RBI cut rates, but the transmission of lower rates to borrowers and huge NPAs of PSU banks need to be factored in. The current market rally should last till the RBI policy. What happens next should be a period of consolidation.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Did the stock market over-react to the 25 bps interest rate cut by RBI?

The short answer to the question is: Yes. Why?

Low inflation during the past few months had increased the likelihood of an interest rate cut sooner than later. It was widely expected that RBI will start slashing interest rates from Feb ‘15 onwards.

While some experts were touting a 50 bps (i.e. 0.5%) cut, the consensus estimate was a 25 bps (i.e. 0.25%) cut in the repo and reverse repo rates to start with, followed by two or three more cuts - totalling 1% for the calendar year 2015.

In other words, a 25 bps rate cut in Feb ‘15 was already ‘discounted’ in the stock indices. But the surprise announcement by RBI of a rate cut before the stock market opened for trading today was a positive trigger for the market to get out of its consolidation mode.

It was definitely good news. But was it great news? I don’t think so. A 25 bps cut in the repo rate means that the rate will drop to 7.75% from 8%. That means the corresponding lending rate to companies by banks will drop from say 12.5% to 12.25%, and home loan rates may go down from 10.75% to 10.5%.

Will that cause a stampede towards banks by companies, or towards housing finance companies by home buyers, from tomorrow? Highly unlikely. Companies or home buyers don’t take decisions about large investments merely because interest rates go up or down by 0.25%.

Why then did Sensex gain more than 700 points, and Nifty move up by 200 points? Those holding shorts had to rush to cover. That gave the initial impetus to the market. Technically also, Sensex and Nifty were poised to break out from consolidations within ‘symmetrical triangle’ patterns. The surprising rate cut news provided a positive trigger to bulls.

So, did you miss buying today? Not to worry. Many others did too. And remember that one day doesn’t make or break your ability to make money.

When realisation dawns on market players that today’s buying was a bit overdone, profit taking will emerge. The likely dip can provide an entry point.

Things are getting in place for stronger economic growth. Today’s rate cut was a small step in the right direction. This bull market will be ascending new heights again.

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How to use Financial News

A re-look at Gilt funds – a guest post

After a decent rally during 2012, backed by strong FII inflows in 2012, the stock market touched 2 year highs. A correction has ensued since then. Slow down in economic growth has forced the RBI’s hand in lowering repo and reverse repo rates, though inflation remains high.

In this month’s guest post, Nishit argues in favour of an investment in Gilt funds – since repo and reverse repo rates have started on their way down.

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We had last reviewed Gilt funds in the month of August ‘11. A lot has changed since then. Let us take a look at where we stand now.

The 10 year bond was trading at 8.2% approx. In a period of 6 months, the rate has come down to 7.9% approx. A period of 6 moths and a rate drop of 0.3% - how does it translate into real returns for an investor?

The Birla Sun Life Government Securities fund, which is a blue chip fund with a 5 star rating from Valueresearcholine.com, has provided an absolute return of 6.61%. When annualized, it becomes 13.22%.

In the next 6 months, Interest Rates should fall by about another 0.5%. Typically in this Interest Rate cycle the peak and the bottom is usually 300 basis points minimum. The peak was about 9%, so the rates should bottom around 6 to 6.5% in the next 2 years.

Now is the time to invest in Government Securities funds, as the Interest rate cycle has clearly started its way down.

Government Securities are the highest rated securities. A default on them is almost impossible, as it would amount to a sovereign default of the Indian state.

If we look at other funds like Income funds, the rate of return has already declined. The trick to make profits from Gilt funds is to ride out the bottoming out of Interest Rate cycle and then move the money back to equity. Typically when the Interest Rate cycle bottoms, it is time to move back into equity.

This happened during October 2008 to March 2009. It happens because rate cuts stimulate the economy - which also means the economy is doing pretty badly. Stock markets are usually 6 months ahead of the economy. When the rate cuts stop and the yield bottoms out, it is also time to invest in equity.

The chart below illustrates how the cycle works. One can compare it with the equity cycle. The rate cuts bottomed out in Dec 2008 and equity markets bottomed in March 2009.

The idea of investing is to safely make a compounded return of around 15-16% every year. When the equity markets are headed downwards, it is time to make money in Gilts and when Gilts are headed down, it is time to make money in Equity Markets.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

A modern day parable about profligacy and prudence

Once there was a young man who lived in a small village more than two hours by train from the nearest big city. None in his family had ever studied beyond Class 8 in school. But the young man had a dream – to become a lawyer and save his fellow villagers from being exploited by the zamindar.

He pursued his dream and did become a lawyer, and went on to earn a huge fortune. He spent a lot of his earnings in building a school and a college near his native village. He also bought large tracts of land with fruit orchards and lakes. The land was cultivated to grow food grains. Fruits from the orchards were sold in the market. The lakes were used for fish farming. Villagers were employed to look after the property – and shared part of the bountiful produce.

Things were going well for the villagers – who were prospering. The lawyer was happy that he was able to make a difference to the lives of his fellow neighbours – though he spent most of his time in the big city.

But there were dark clouds on the horizon. The lawyer had a son who was a good-for-nothing spendthrift, who spent most of his time with friends and enjoyed the good life. Despite his best efforts, the lawyer could not make his son mend his ways. He was too busy with his legal practice anyway. So he thought of a plan.

He formed a trust, with his childless younger brother as the trustee. His son was to receive a regular allowance per month, but the trustee was the sole authority for sanctioning any additional expenditure. After the lawyer passed away, the trust came into force – much to the chagrin of his son.

He was soon running through his monthly allowance and kept asking for more from his uncle, the trustee. The uncle was initially indulgent, because he felt sorry that the young man had recently lost his father. But he soon realised that his nephew was taking undue advantage of his indulgence. So, he tightened the screws and refused to sanction extra amounts.

The nephew was taken aback, but instead of mending his ways, he brought over his friends and tried to threaten his uncle with dire consequences. But the uncle refused to budge. So he changed tactics and started imploring and cajoling his uncle for more money.

The uncle said he may re-think provided his nephew met certain conditions. First, he would need to get rid of his freeloader friends. Next, he would need to take an active interest in his father’s property in the village – to ensure that the villagers were doing a proper job of maintenance and upkeep as well as to plug the large amount of leakage of produce that was being siphoned off by various middlemen.

The nephew agreed to the conditions and did prevent his friends from hanging around all the time – though he didn’t really get rid of them. The uncle sanctioned some extra allowance as a quid pro quo. But the nephew showed no interest in looking after the village property of his late father, nor in plugging the pilferage.

Next month, the uncle refused to sanction any extra money, and reiterated his conditions. The nephew promised to change, but his uncle said he won’t sanction anything till he actually saw some change on the ground.

And so the stalemate continues at the time of writing. The nephew (read UPA II) may have good intentions to change, but is unwilling or unable to do so because of his friends (the Mulayams and Mamatas). The uncle (read RBI Governor) has put his foot down and said thus far and no further (by keeping repo, reverse repo and CRR unchanged). The 1% cut in the SLR – from 24% to 23% – was just a token gesture to show good intentions by increasing liquidity without affecting the high inflation rate too much.

To cut, or not to cut, that is the question: for the RBI Governor

“Whether 'tis nobler in the mind to suffer
The slings and arrows of (outraged industrialists and analysts),
Or to take arms against a (policy-paralysed government)
And by opposing end them…..” (with due apologies to William Shakespeare).

It wouldn’t be at all surprising if the RBI Governor is thinking like Hamlet prior to the policy announcement on Jun 18 ‘12. On the one hand, the abysmal IIP figure of 0.1% raised hopes of an interest rate cut among various stock market participants, who went on a buying spree. On the other, rising inflation poured cold water on rate cut expectations, and the stock market tanked.

 

What is so great about an interest rate cut, and why are market participants getting swayed by opposing possibilities? There was a greater–than-expected 50 bps (0.5%) repo and reverse repo rate cut in April – what happened after that? The stock market dived in May! Even if there is a 25 bps or 50 bps rate cut in June, it is highly unlikely that the sluggish economic growth engine will suddenly spring back to full speed.

 

Rate cuts tend to have a lag effect on the economy. Only after several rate cuts can one expect the captains of industry to start investing again and revive stalled expansion projects. Also, rate cuts alone can’t stimulate the economy. The government has to play an enabling role by cutting wasteful expenditure on subsidies and populist programmes, and make it easier for entrepreneurs and businessmen to start and expand businesses by reducing red tape and corruption.

 

From one extreme of doling out coal blocks and mining rights to all and sundry after duly lining their own pockets, government mandarins have gone to the other extreme of not sanctioning anything because they are afraid of being put behind bars on graft charges. Where bold policy decisions are the order of the day, senior ministers and opposition members are turning themselves into a laughing stock by their idiotic bickering and posturing over who will become the next President of India.

 

The great Indian growth story is being stymied by self-serving, thick-skinned representatives of the people who think it is their birth-right to loot the country’s resources. And they have the gall to blame the RBI Governor because without growth there will be no new projects, and without new projects the politicians can’t make money!

 

The RBI Governor should stick to his guns and conscience (he seems to be the only one with a conscience) and not succumb to any pressure about cutting interest rates in June. In fact, if inflation continues to rise – which is a good possibility because of the delayed monsoon – he should raise rates.

 

Will that be bad for the stock markets? Sure it will. The market seems to have factored in some sort of a cut – either in the interest rate or the CRR. Leaving rates unchanged may be taken as a negative.

 

Investors should take the motto of the Boy Scouts to heart: Be prepared. A drop below 4700 on the Nifty would provide a good buying opportunity. A spurt to 5200 can be used to sell.

What message did RBI convey with the 50 bps interest rate cut?

In a move that pleasantly surprised the market, RBI’s governor announced a 50 bps (0.5%) cut in the repo and reverse repo rates, while keeping the CRR unchanged. The consensus estimate, after announcement of a slightly lower WPI inflation rate on Monday (Apr 16 ‘12), was a 25 bps cut. The repo and reverse repo rates are back to levels last seen in Jul ‘11.

RBI had made it quite clear through several previous policy announcements and interest rate hikes that controlling inflation was its top priority, even if it curtailed growth. Of late, it had come under a lot of criticism from corporate bigwigs and analysts for being too hawkish, since the rate hikes didn’t help in bringing down inflation by much.

Monetary policy alone can not help moderate inflation in a situation where the country’s current account deficit (currently at 4.3% of GDP) and government’s fiscal deficit (now at 5.9% of GDP) are at unsustainable levels. RBI had pretty much exhausted its policy options. Unless the finance ministry reduced its wasteful expenditure on subsidies and took bold decisions on economic reforms, there wasn’t much the RBI could do. Note the status quo that existed from Nov ‘11 to Mar ‘12 in the chart below:

Q3 GDP figure of 6.1% – down from the heady days of 9-10% growth a few years back – and WPI inflation falling below 7% probably forced the RBI’s hand. They were being made the scapegoat for India’s sliding GDP growth, when the blame should have been laid squarely on an inept and scam-ridden government.

Today’s 50 bps rate cut is a clear message to the finance ministry from the RBI: “We have done more than was expected; now it is your turn.” Unless efforts are made to curtail deficits and bold policy initiatives are taken to attract overseas investments, inflation will start rising again as the base effect of the previous year wears off. The RBI governor has clearly mentioned the possibility in his policy statement. Further rate cuts that are required to stimulate the economy and incentivize capital expenditure by corporate India will then be kept on hold.

The following chart depicts the relation between the repo rate, WPI inflation and industrial production over the past eight quarters:

It is quite clear from the chart that industrial growth has been affected in a high interest regime. Will corporate India jump up and open its purse strings because of the 0.5% lowering of interest rate? Not very likely. That means slow growth will continue for another quarter or two. It is now up to the government to take policy decisions that will be good economics rather than good politics.

The proposed ban on prepayment penalty of floating rate loans will be welcomed by EMI payers. For the stock market, any drop in interest rate is good news. The bulls should come charging with renewed vigour.

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Did the stock market over-react to the 50 bps CRR cut by RBI?

The short answer to the question is: Yes. The CRR rate cut is good news, but not great news. Great news would have been a cut in the repo and reverse repo rates. Now, the long answer.

Imagine that you are a farmer in central India, and it is the middle of April. With poor access to irrigation facilities, your crop is dependent on the monsoon rains. Your cousin from the nearby town comes to visit you and mentions that it was announced on the TV that monsoon may set in a week early in the middle of June instead of the third week. No doubt, that would be good news. But the rains will still be two months away.

RBI's announcement is somewhat similar. The CRR rate cut is an indication that repo and reverse repo rates may be reduced two months down the road. So, today's high volumes may be a sign of a buying climax.

What is the CRR and what purpose will be achieved by cutting it from 6% to 5.5%? Cash Reserve Ratio (CRR) is a percentage of the total deposits in a bank that has to be maintained as a 'reserve' with the RBI. It is one of the monetary instruments used by the central bank to regulate the money supply in the financial system.

Due to the aggressive interest rate increases by the RBI to contain inflation, growth has started to slow down. In fact, the RBI has now set the GDP growth target for 2011-12 at 7% - down from earlier revised target of 7.6%. Much lower than the glory days of 9-10%. India Inc. have been complaining that growth was being sacrificed to control inflation. Now that inflation rate has finally started to moderate, RBI has taken the first step by increasing the liquidity in the financial system.

How does it work? Let us say, a bank has Rs 10,000 Crores as deposits. A 6% CRR implies that Rs 600 Crores have to be maintained as a 'reserve' with RBI. That means, the bank has access to only Rs 9400 Crores that it can give out as loans. A 50 bps (i.e. 0.5%) cut in the CRR leaves the same bank with access to Rs 9430 Crores to deploy gainfully. On the extra Rs 30 Crores, the bank can expect to generate an additional Rs 3 Crores in profit.

The overall cash infusion into the banking system is expected to be about Rs 32,000 Crores, which can be loaned out to generate a profit of say Rs 3200 Crores. Not a small sum, but not a king's ransom either. Now you know why the bank stocks rose today. But that is the theoretical view point. What is likely to happen in real life?

Is India Inc. going to break down the doors of banks to apply for loans? Highly unlikely. Remember that the interest rates remain just as high as it was two months back, when no one was taking loans and were postponing capital expenditure. Banks are also struggling to contain their NPAs and have become quite rigid in doing due diligence before handing out loans. Add to that the likelihood of the inflation fires getting stoked by the excess liquidity in the system. There is also 'hidden' inflation due to large subsidies.

All in all, definitely not a cause for celebration. The RBI governor clearly put the ball in the government's court by pointing out that fiscal profligacy is one of the major causes of inflation. Unless core inflation falls further, do not expect a cut in the repo or reverse repo rates in a hurry.

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RBI pauses interest rate hikes – why did the stock market dive?

Stock markets and interest rates have a love-hate relationship. Markets love low interest rates, but detest high interest rates. ‘Low’ and ‘high’ are relative terms. As a very rough thumb rule, a Repo rate of 5% or lower can be taken as a ‘low’ rate; 7% or higher can be considered a ‘high’ rate.

In Jul ‘08, the Repo rate (the interest rate payable by commercial banks when they borrow money from the RBI) had peaked at 9% – more than 6 months into the previous bear market that lasted from Jan ‘08 to Mar ‘09. Thereafter, Repo rates and Reverse Repo rates (interest rates payable by RBI when they borrow money from commercial banks) were gradually reduced till the Repo rate hit a low of 4.75% in Apr ‘09.

By Mar ‘09, when the Repo rate was at 5%, the stock market reversed direction and started rising. The ‘lag’ effect of interest rate changes are evident from the above data. Bear markets start well before interest rates hit their peak; bull markets start before interest rates drop to the bottom.

The next increase in the Repo rate came only in Mar ‘10, when it was raised from 4.75% to 5%. The bull market was already a year old by then. Thereafter, 12 more rate increases – the last of them in Oct ‘11 – took the Repo rate to a high of 8.5%. By then, the bear market from the top of Nov ‘10 was almost a year old.

Why do stock markets hate high interest rates? Because the cost of doing business increases for every one, and profits take a hit. Capital expenditure is postponed, which hurts growth and in turn, hurts profits. When earnings decrease, EPS reduces. P/E ratios become higher, which induces selling of stocks and shifting of investments to bank fixed deposits at high rates.

Two months back, RBI last increased the Repo and the Reverse Repo rates by 25 basis points (0.25%). The stock market had expected the hike, but appeared to celebrate the news by moving up. That seemed to go against logic. Stock markets are supposed to hate high interest rates. What may have caused the celebration was a hint by the RBI that they may not raise rates further if inflation rate started to moderate.

Inflation rate has started to drop, though it continues to remain high. Food inflation has fallen quite remarkably – whether due to seasonal reasons or high ‘base effect’ or both. The high interest rates caused GDP growth to slow down and de-growth in IIP (Index of Industrial Production). So, it was no surprise that RBI left the interest rates unchanged, and hinted that rates may be lowered henceforth to spur growth. Instead of celebrating, the stock market dived – again appearing to defy logic.

What happened? Many market players had expected a cut in the CRR (Cash Reserve ratio – the percentage of total deposits that commercial banks have to maintain in cash) to inject more liquidity into the financial system. But a combination of an inflation rate that is still high and a fast depreciating Rupee against the US dollar may have forced RBI’s hand in keeping the CRR in tact. That perhaps caused disappointment that led to the sell-off today.

During a bear market, the slightest bit of ‘bad’ news causes a disproportionate amount of negative sentiment. Even if the news isn’t bad for the long-term but appears to be bad in the short-term gives a good enough reason to sell. The opposite happens in bull markets, when the slightest bit of ‘good’ news sends the stock indices soaring. That is an unlikely occurrence at least for another 6 months. Till interest rates are reduced significantly, the bulls will not return.

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