Winning Strokes

The markets have been rising since some time, without much fundamental backing. Yesterday the BSE Sensex closed at 51,279.51 up 254.03 points (+0.50%) while the Nifty50 ended the day at 15,174.80 up 76.40 points (+0.51%). The Nifty is above 15,000 and the P/E of the Nifty50 is at abnormally high at 41.33. The optimism in Dalal Street has long go disconnected from the fundamentals of the main street. The unbridled optimism of some known bulls like Rakhesh Jhunjhunwala is providing more fuel to this fire. 

Moreover, there is an interesting take on the precarious state of borrowings by the NDA government, as mentioned below by Tamal Bandyopadhyay in his article: What is the RBI governor up to?

//The bond market is just refusing to listen to the central bank.

Look at these figures: The 10-year bond yield closed last year at 5.865 per cent. A month later, on January 29, 2021, it crept up to 5.906 per cent.

On February 1, the day of the Union Budget, it rose to 6.06 per cent. After hitting a high of 6.153 per cent, on the presentation of the RBI policy on February 5, it cooled down to 6.071 per cent.

Since then, the graph is moving northwards despite the central bank's aggressive intervention -- both in words and action. Last fortnight, it closed at 6.23 per cent.

Why? It's elementary, my dear reader: The wide gap between demand and supply.

The RBI seems to have its own logic. Historically, the spread between the Indian central bank's policy repo rate and the 10-year yield is around 150 basis points. Since repo rate is 4 per cent now, the 10-year bond yield should be around 5.5 per cent.

But that's in normal circumstances. The size of the government borrowing is too high to be absorbed by the bond buyers. In the current financial year, the central government is borrowing Rs 12.8 trillion.

Add to that, around Rs 8.25 trillion of state development loans and another Rs 1.1 trillion borrowing by the central government to take care of the shortfall in the GST collection of the states. This pegs the total borrowing at Rs 22.15 trillion.

There will be little respite in the next year when the collective borrowing of the Centre and the states will be at least Rs 20 trilling. 

We can get a sense of how abnormal the size of the borrowing is if we look at the size of the Centre's borrowing in the recent past. In 2020, it borrowed Rs 7 trillion and in 2019, Rs 5.96 trillion. A decade back, in 2010, it was Rs 4.2 trillion//

This actually reflects the current illness of Indian economy in midsts of the all the hype and hoopla surrounding the unidirectional rise of the Indian bourses. 

The humongous figure of borrowing by the NaMo government in the name of expansionary policies, is sure to rattle the bond market in future too; whose effect could be felt in managing Inflation too (unless the current dispensation in Delhi fudges the inflation data. NaMo government can't be believed when the ecomic data is concerned). 

In such a scenario I'm looking for a healthy correction in Nifty till 14000/13600.

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