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The Nifty 50 and the Indian economy

20 November, 2017

The Nifty 50 is consolidating after correcting during most of November, as traders attempt to determine if current support levels will hold.

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  Prices have been trading under pressure on trade deficit concerns following a drop-in export in October which was compounded with a higher import figure generating a revenue shortfall.  Inflation remains steady, and beat expectations which continues to point to a change in monetary policy as prices hit the upper boundary of the RBI’s target inflation range.

Similar to many global equity markets, valuations of the Indian market is stretched with price to earning values printing near 21.  One of the issues facing the Indian economy is their reliance on imported oil.  Higher oil prices, increase the import bill putting pressure on a government that does not pass all of the increase to consumers.  If WTI crude oil prices break out above the current range that is capped near $60, and move up to $75, the Indian economy would likely need to be re-evaluated.

Inflation in India is Rising 

Indian CPI for October showed an initial reading of 3.58% vs expectations that the headline number would come in at 3.46%, according to iForex Market News. This compares to the Septembers year over year gains in headline inflation at 3.28%. Core inflation again was solid at 4.50% vs 4.60% in September. Inflation data appears to be testing the upper band of RBI target and thus likely dashed hopes for additional rate cuts at the December RBI monetary policy meeting, or possibly extending a neutral policy throughout all of 2018. In fact, if inflation remains sticky, the RBI could consider a rate hike as their next move.

The increase in consumer inflation at the headline level to 3.58% is fastest in the last 7 months. The rise was driven by rising food and fuel prices. Rising Crude oil prices may be a major contributor for CPI as every $10 increase in the price of crude oil buoys the CPI by around 0.5% of GDP. Looking forward, the HRA reports by several states Governments may boost headline CPI, specially housing inflation, but recalibration of GST rates could contain the numbers if passed on appropriately.


 Nifty 50 is in an Uptrend

The Nifty continues to trade in an extended upward trend, gaining a foot hold near support levels at the 50-day moving average at 10,125.  Prices have revisited and in some instances briefly pierce through the 50-day moving average, but this average has been a great guide of price action for the majority of 2017.  Prices are revisiting the last breakout level which coincides with the 50-day moving average. The next level of target support on the Niffy 50 is seen near the September lows at 9,687.  A break of this level would damage the uptrend as it potentially tests support near the 200-day moving average at 9,592. Resistance is seen near the all-time highs at 10,490.

Momentum has turned negative as the MACD (moving average convergence divergence) index recently generated a crossover sell signal. The MACD histogram is printing in the red, but has found support equal to the dips in August and September, which could foreshadow a divergence.

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