PostMortem on BankNifty Today & Analysis of 05 APR 2023 RBI MPC
Before we get into today's analysis let us spend some time on Inflation, MPC minutes by RBI & health of banking sector.
You might be aware we have the MPC minutes & interest rate decision tomorrow. There are 3 possible outcomes
status quo
dovish
hawkish
What really prompts RBI to rate hike are 2 things
Inflation
Liquidity in the markets
Now the last minutes showed RBI not planning to lower its guard on fighting inflation - read here. What this means is that the inflation is still persisting at the upper band of 6%. And thats not at all good news for the economy as the cost of products keep rising at a level which will push a lot of people into malnutrition.
The best tool the central bank has to counter inflation is to slow the economy by making the borrowing costs higher. ie increase interest rate (hawkishness).
In spite of the recent rate hikes, the 10YR GOI bonds reference index is trading at 7.27%. The banks has raised their lending rates as well as the deposit rates - but this is not materially felt in the GOI bonds or Gsecs.
For comparison purpose, the 10YR US bonds has been plotted against the 10YR IN. Look at how steadily we have maintained a range whereas US bond rates has climbed 700% from the swing low.
What I am trying to say is that the recent rate hikes here has not impacted the stock market, only if the higher tenure bond rates go up we can expect the stock market to fall. ie. people liquidating their equity scrips in favor of GOI bonds to get assured returns.
Now the real reason why the Gsecs are not providing yields above 7.5% is something I have no clue on.
What happens if RBI increases the rates too much? The borrowers will have to cut down their expenses, capex etc to save money and reduce dependence on loans. One of the best way to do that is to reduce the employee strength.
None of the previous rate hikes has triggered such a situation, RBI is also playing safe not to push it too much - a political move fearing the 2024 elections? I do not know.
Until they do that, people will continue to spend very heavily on commodity which will help inflation stay elevated.
Recently the Govt. of India removed the LTCG indexation benefit for debt funds. Indexation benefit is the only thing that really accounts for the failure of the government in controlling the inflation. Because higher the inflation lesser will be the capital gains tax for the debt funds. Now the removal of this inflation index from picture is an open license to let inflation run elevated? I do not know.
---
Coming back to the analysis part,
BANKNIFTY opened well above the resistance level of 40880 at 40972. Made a strong 1st candle briefly coming below this SR and then closed higher indicating bulls may be in control.
Today'sBANKNIFTY performance might be skewed due to the moves in 
HDFCBANK - I am yet to figure out why we had a 2.68% gain in HDFCBK the highest weighted stock in bank nifty index.
If you look at the opening minutes of the other major banks the counter balance trades that had to be done to keepBANKNIFTY at neutral position was so huge.
ICICIBANK , 
KOTAKBANK , 
AXISBANK & 
SBIN had to go into negative territory to compensate for the weight exerted by HDFCBANK . And for some reasons these were not impacting the option prices.
On some other day the option premiums would have shot up due to the uncertainty - but today we had a below normal premiums.
Even with the MPC scheduled for tomorrow - there was no fear ! The option prices dipped below the usual Wednesday closing averages.
---
15mts chart is looking bullish now with the top most support point well defended. Bears can only hope we have a pull back rally, if they are lucky the HDFCbk trades could reverse tomorrow bringingBANKNIFTY back to the range.
Charts do not work on hopes, but we humans do!
---
1hr is not bearish nor bullish. Further resistance break out will shift the sentiment in favor of the bulls. A decent pull back should be in the cards because of the distance price has covered from 27th March.
You might be aware we have the MPC minutes & interest rate decision tomorrow. There are 3 possible outcomes
status quo
dovish
hawkish
What really prompts RBI to rate hike are 2 things
Inflation
Liquidity in the markets
Now the last minutes showed RBI not planning to lower its guard on fighting inflation - read here. What this means is that the inflation is still persisting at the upper band of 6%. And thats not at all good news for the economy as the cost of products keep rising at a level which will push a lot of people into malnutrition.
The best tool the central bank has to counter inflation is to slow the economy by making the borrowing costs higher. ie increase interest rate (hawkishness).
In spite of the recent rate hikes, the 10YR GOI bonds reference index is trading at 7.27%. The banks has raised their lending rates as well as the deposit rates - but this is not materially felt in the GOI bonds or Gsecs.
For comparison purpose, the 10YR US bonds has been plotted against the 10YR IN. Look at how steadily we have maintained a range whereas US bond rates has climbed 700% from the swing low.
What I am trying to say is that the recent rate hikes here has not impacted the stock market, only if the higher tenure bond rates go up we can expect the stock market to fall. ie. people liquidating their equity scrips in favor of GOI bonds to get assured returns.
Now the real reason why the Gsecs are not providing yields above 7.5% is something I have no clue on.
What happens if RBI increases the rates too much? The borrowers will have to cut down their expenses, capex etc to save money and reduce dependence on loans. One of the best way to do that is to reduce the employee strength.
None of the previous rate hikes has triggered such a situation, RBI is also playing safe not to push it too much - a political move fearing the 2024 elections? I do not know.
Until they do that, people will continue to spend very heavily on commodity which will help inflation stay elevated.
Recently the Govt. of India removed the LTCG indexation benefit for debt funds. Indexation benefit is the only thing that really accounts for the failure of the government in controlling the inflation. Because higher the inflation lesser will be the capital gains tax for the debt funds. Now the removal of this inflation index from picture is an open license to let inflation run elevated? I do not know.
---
Coming back to the analysis part,
BANKNIFTY opened well above the resistance level of 40880 at 40972. Made a strong 1st candle briefly coming below this SR and then closed higher indicating bulls may be in control.Today's
BANKNIFTY performance might be skewed due to the moves in HDFCBANK - I am yet to figure out why we had a 2.68% gain in HDFCBK the highest weighted stock in bank nifty index.If you look at the opening minutes of the other major banks the counter balance trades that had to be done to keep
BANKNIFTY at neutral position was so huge.ICICIBANK , KOTAKBANK , AXISBANK & SBIN had to go into negative territory to compensate for the weight exerted by HDFCBANK . And for some reasons these were not impacting the option prices.On some other day the option premiums would have shot up due to the uncertainty - but today we had a below normal premiums.
Even with the MPC scheduled for tomorrow - there was no fear ! The option prices dipped below the usual Wednesday closing averages.
---
15mts chart is looking bullish now with the top most support point well defended. Bears can only hope we have a pull back rally, if they are lucky the HDFCbk trades could reverse tomorrow bringing
BANKNIFTY back to the range.Charts do not work on hopes, but we humans do!
---
1hr is not bearish nor bullish. Further resistance break out will shift the sentiment in favor of the bulls. A decent pull back should be in the cards because of the distance price has covered from 27th March.
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