When Nifty futures trading at Singapore jumped four per cent on the evening of May 12 at Prime Minister Narendra Modi’s mention of the Rs 20 lakh crore stimulus package – equivalent to nearly 10 percent of India’s GDP and matching United States Congress aid to their economy – they didn’t factor in one basic thing. That the Indian government believes that math didn’t help Einstein discover gravity. And that hard work is more important than Harvard. So, while in the rest of the world, the absolute basic that a government does while providing a stimulus to the economy is mention the amount of additional spending and its source, ours doesn’t even get into these mundane details.
Unimpressed
There’s no stimulus package. Period.
What the government has tried to drum roll is a mixture of bond buying by Reserve Bank of India to pump in additional cash in the banking system, some loan guarantees and rehashing of existing budgetary provisions.
So, it’s clear that the additional borrowing of Rs 4.2 lakh crore that the government had announced the previous week was not to fund any additional spending, but despite it. Don’t trust me? While the announcement of the additional borrowing saw a selloff in India’s benchmark 10-year bonds on Monday and saw the yields on them rise by 20 basis points to 6.17 percent, the unveiling of the so-called stimulus starting Wednesday afternoon saw the yields push back below 6 per cent by Thursday. One basis point is one-hundredth of a percent.
Demographic tax
With the mirage of the stimulus gone, Indian equities got another reality check after the gap up on Wednesday, with the benchmark Nifty barely holding on to 9000 by close on Friday. For those who still believe mathematics can help them discover the losses in their portfolios, the Nifty is down over seven per cent in the first couple of weeks of May.
And while US equities continue to fight between a Federal Bank blank cheque on the one hand and economic Armageddon on the other, Indian equity investors seem to have resigned to fate. In much the same way as millions of migrants have taken it upon themselves to walk back home from metros. Facts that suddenly make us wake up to reality. That hyperbole is not a replacement for strategy. That hyper nationalism doesn’t feed an empty stomach. In most likelihood, it’s a cover for bad policies.
What the humanitarian crisis involving migrant labourers has done is to expose the ugly underbelly of the Indian economy.
That messed up policies have created income inequalities not seen in decades. That the wheels of an economy, dependent on consumption and fed by a boom in personal loans, can come off at the first whisk of crisis. More importantly, it’s starting to hint that we are heading towards a massive labour crisis and social unrest. A system that has let large chunks of its labour force hang out to dry, will most likely see the pendulum swing back to the other extreme in the form of an assertive and politicised labour post COVID-19 lockdown and even worse.
Sell the rip
The only reason the Nifty is still above 9000 is because of the fact that US equities continue to hold strong. While the last week saw the first hints of another major leg down for them, there hasn’t been a follow up yet. There were hours of extreme weakness, but they have all found support. 2760-2960 on the benchmark S&P 500 seems to have emerged as a battle zone between bulls and bears and a break below/above these boundaries will most likely determine the trend for the rest of the year.
As for the Nifty, the abandoned baby of the previous week saw a similar pattern getting formed after the stimulus hope-induced gap up on Wednesday.
While there hasn’t been any aggressive follow through yet, the writing is on the wall.
The only sector which has shown genuine strength since the March low – pharmaceuticals – has a mere three per cent weightage in the Nifty. Financial services, the darlings of bears, on the other hand, continue to be in the driver’s seat with 35 percent weightage.
So, for the Nifty to defy gravity, banks will have to start a serious leg up. And without any serious handle on the outcome of the COVID-19 lockdown and increasing calls for an extension of the RBI mandated moratorium on loan repayment that looks impossible. In any case, the uptrend line from the March low has clearly been broken. Hence, in the coming week, if the S&P 500 continues to hold strong, we will, at best, drift sideways to lower levels. But if the US starts another leg down, we will, most likely, plunge into the 8500s.
(Lead Illustration by Shefali Saxena)
(The writer, T-Rex, is not a dinosaur. He is a technical analyst from the previous century.)
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of 30 Stades.
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