MARKET PULSE: Weekly report for 12-16 March 2012
Breaking News: RBI slashes CRR by 75 bps effective 10th March 2012
RBI’s decision to cut CRR by 75 bps effective 10th March (to release around Rs.50K Crores of cash into the system) ahead of midterm review of monetary policy (scheduled for release on 15th March) is viewed as sensible and proactive. It was highlighted in MARKET PULSE of the previous week (05-09 March) the immediate need for 50-100 bps CRR cut effective 10th March to prevent run-away weakness in the Money market during the week 12-16th March with the risk of LAF draw down exceeding Rs.2 Trillion; trigger of MSF counter at 9.5%; spike in call money rate into double-digit and high money market rates over 12% in the shorter tenors. Over all, RBI has delivered to the expectation to prevent the worst ahead of end of FY12. The immediate positive impact in money market may not be significant in the near term. The demand on LAF counter will be at Rs.1.0-1.5 Trillion during the current week; call money rate at 8.75-9.0%; 1-3M rates at 11.0-11.5% and 6-12M rates at 10.75-11.0%. It is also expected that system short fall into FY13 will be around Rs.50-75K Crores on fortnightly average basis (close to RBI’s comfort level of 1% of NDTL) to keep operative policy rate at higher end of LAF corridor till Q2/FY13.
What is the expectation on the policy day? The focus will be on policy rates. The cut in CRR by 125 bps since end January 2012 will release minimum Rs.8000 Crores of NII into the banking system in FY13. RBI will expect pass-through of this benefit to borrowers by reduction in lending rates but it would be in order for Banks to hold back cut in Base Rate/BPLR till downtrend in cost of funds is clearly established. The high money market rates since December 2011 has squeezed the margin from financial intermediation and the expectation from RBI is to address the cost of liquidity in the midterm review on 15th March. RBI has two options for this purpose: (a) either to push the operative policy rate from Repo rate to R/R rate (from 8.5 to 7.5%) through another one-shot CRR cut of 100-150 bps or (b) deliver 50 bps rate cut and maintain the operative policy rate at the higher end of LAF corridor (at 8.0%) into FY13. While it is not fair to expect another round of CRR cut (after delivery of 125 bps cut in 45 days), it is prudent and sensible to expect 50 bps rate cut to drive money market rates below Base Rate of Banks. It is also essential for RBI not to go aggressive on CRR cuts and continue with its liquidity injection through OMO bond purchases to maintain 10Y bond yield at 8.0-8.20% into the short/medium term. The monetary policy transmission in lending rates needs to be lead by significant downtrend in deposit rates. RBI has to shift to pro-growth monetary stance to support the Government in its efforts to manage issues relating to fiscal deficit (and growth). These two critical agenda at this stage needs shift into rate reversal cycle soon; expectation therefore is for delivery of 50 bps rate cut on 15th March.
What is the outlook on Bond yields/OIS rates? Bond/OIS market has already seen the worst and our strategy was to stay invested (on this extended weakness) in 1Y bond at 8.40-8.50%; 10Y bond yield at 8.25-8.30% and stay received on 1Y OIS at 8.15-8.20% and 5Y OIS at 7.45-7.50% on expectation of 50-100 bps CRR cut from RBI effective 10th March. Now that RBI has delivered 75 bps CRR cut (with expectation to deliver 50 bps rate cut on 15th March), the focus has now shifted for downtrend into 8.25% (1Y T-bill yield); 7.90% (1Y OIS rate); 7.25% (5Y OIS rate) and 8.10% (10Y bond yield). It is prudent to exit long bonds and received OIS book at the set objectives and await fresh cues thereafter. For the week, let us watch 10Y bond yield at 8.15-8.25%; 1Y OIS rate at 8.0-8.15% and 5Y OIS rate at 7.25-7.40% with bias into lower end, not ruling out test/break thereof. Hold on to 1Y OIS book received at 8.23%; 5Y OIS book received at 7.47% and 10Y bond book at 8.27-8.29% for exit at lower end of the set ranges.
Currency market
It was perfect move as per script; USD/INR failed at the set strong resistance zone of 50.65-50.90 (high of 50.76) for sharp reversal into the set support zone of 49.90-49.75 (low of 49.82) before close of week at 49.85. We asked exporters to sell 1-3M dollars on this move (pushing forward dollar value to above 51 for 1M) and we saw high of 51.15 (1M) and 51.77 (3M) considered good on expectation of USD/INR consolidation at 49-51 into the short term. What next? USD/INR moves have been volatile but stayed within the outer limits to prevent set up of panic. The outer limits of 48.85-48.60 (low of 48.60) and 50.65-50.90 (high of 50.76) have been safe providing good opportunities for importers to cover 1-2M payables below 49 and exporters to cover 1-3 receivables above 51. Given the expectation of consolidation at 49-51 in spot rupee for the next couple of months, forward dollars (for tenor up to 3M) will look cheap (to acquire) below 49 and attractive (to sell) at 51-52 (for 1-3M tenor). USD Index has now shifted its near term range (from earlier 78.20-79.50) into 79.00-80.30 and looks good for extended gains into 81.75-82.00. The set up of inflation worries in the Euro Zone and growth momentum in the US zone is positive for the USD into the short/medium term. Over all, things are mixed at this stage but let us continue to stay tuned to near term consolidation at 49-51. Let us also stay neutral on directional break-out and await fresh cues considered strong enough to provide break-out signals. Rupee continues to stay dependent on external liquidity for its strength given the pressure on the trade gap; hot money FII flows have been robust since beginning of 2012 and there is no risk of reverse flow at this stage given the liquidity over-hang in the Western markets and bullish expectations on the Indian economy. The growth supportive stance of the Government and RBI will create opportunities for sustainable FII/FDI flows into Indian asset markets. The attractive return on the debt market will also attract flows from FII/NRI investors. The risk (and threat) from crude oil price is valid as we watch war of words between Iran and the West and in any case there is no fear of extended rally in NYMEX crude beyond 110-115 while the bias is for sharp reversal below 95 into the medium/long term. It is also important to keep interest rate play in force to maintain forward market in supply driven mode and would look for deregulation of FCNR rates for this purpose. Over all, there are no strong cues to turn bearish on rupee at this stage. For the week, let us watch 49.75-50.75 with gradual bias into higher end in the immediate term. The strategy is to trade end-to-end of immediate support at 49.70-49.55 and resistance at 50.65-50.80 with tight affordable stop; higher demand for dollars ahead of month/year end and pressure on EUR/USD will keep rupee under pressure this week. It is prudent to exit short dollars and trade from long side for this move.
FX premium traded end-to-end of set ranges of 8.0-8.75% (3M) and 5.75-6.25% (12M) before close of week at 8.70% and 6.20% respectively; spike from the lower end was sharp triggered by bearish set up in money market and reversal in USD/INR from 50.75 to 49.85. In the process, 12M held well at the set pay zone at 5.80-5.65% for quick move into the receive zone of 6.10-6.25%. Now, bullish momentum from interest rate play will stand diluted while exchange rate stays neutral tracking consolidation in spot rupee around 50. For the week, let us continue to watch 8.0-8.75% in 3M and 5.75-6.25% with immediate bias into the lower end. There is no change in outlook for shift into short term consolidation at 6.5-7.5% in 3M and 5.0-5.5% in 12M on shift into FY13. RBI is expected to deregulate FCNR rates to prevent sharp reversal in premium to keep the forward market in dollar supply driven mode. The strategy is to trade end-to-end by receiving 12M at 6.10-6.25% and pay at 5.75-5.60%. It is good to receive 3M at 8.5-8.75% for ALM play.
EUR/USD traded end-to-end of set buy zone at 1.3125-1.3075 (low of 1.3095) and sell zone of 1.3250-1.3300 (high of 1.3291) before close of week at 1.3113. EUR/USD is looking weak tracking good economic data from the US and inflationary build-up in the Euro zone. The risk in the immediate term is for build-up of bearish momentum for push into the lower end of set near term range of 1.2975-1.3325; test/break of lower end will set up extended weakness into 1.2600-1.2650. For the week let us watch 1.30-1.3250 with overshoot limited to 1.2950-1.3300; not ruling out extended weakness into 1.2650. The strategy is to stay “short” for this move by selling in two lots at 1.3175-1.3200 and 1.3250-1.3275 (with stop above 1.3300) for 1.2975/1.2625.
USD/JPY nicely traded end-to-end of set near term range of 80.50-82.50 (low of 80.56 and high of 82.64) before close of week at 82.45. In the meanwhile, EUR/JPY held well at the set buy zone of 106.00-105.50 (low of 105.62) and rallied from there to meet the set objective at 108.25-108.50 (high of 108.63) before close of week at 108.10. Let us now allow for bit of consolidation in USD/JPY at 81-83 before gaining momentum for the next pit stop at 85.00-85.50. Given the downward momentum in EUR/USD, let us stay aside in EUR/JPY which is expected to stay steady tracking downtrend in EUR/USD and uptrend in USD/JPY. However, EUR/JPY will get strong support at 107 to retain its 107-110 near term range. For the week, let us watch USD/JPY at 81-83 with test/break either-way to attract. The strategy is to buy 81.25-80.75 (with stop below 80.50) and to sell at 82.75-83.25 (with stop above 83.50).
Commodity market
The reversal in Gold (from the recent high of 1790) lost momentum at the solid support zone of 1665-1660 (low of 1664) and closed the week below immediate resistance at 1715 at 1712. Given the overall USD strength, Gold is expected to lose its bullish momentum below 1735-1750 resistance zone for pull back to 1665-1650 support zone. For the week, let us watch consolidation at 1650-1750 with bias into the lower end. The trade strategy is to trade end-to-end of this range by selling at 1735-1750 and buying at 1665-1650 with tight affordable stop on break thereof.
NYMEX Crude is boxed at 105-108 (low of 104.35 and high of 108.20) with test/break either-way attracts good interest. The Iran factor continues to dominate to prevent sharp reversal below 105 while fear of intervention is cutting the bullish momentum above 108. For the week, let us watch 105-110 with test/break either way to attract. The strategy is to trade end-to-end by buying at 105.50-104.50 and selling at 109.50-110.50 with tight affordable stop. The short/medium term look for extended reversal into 95 is valid.
Equity market
NIFTY held its weakness at strong support zone of 5200-5175 (low of 5171) and lost steam at immediate resistance zone at 5385-5400 (high of 5382) before close of week at 5333. The recommendation for strategic investors was to absorb correction in three lots at 5275/5175/5075 for bullish reversal into 5550-5650. Now, RBI’s aggressive shift into growth supportive monetary policy will provide bullish momentum and domestic investors are likely to join the party along with FIIs. The immediate targets are at 5450/5525/5625 to complete end-to-end move of the set near term range of 5100-5600. The market is firmly in control of the bulls who will dominate the street into the near/short term. For the week, let us watch 5275-5625 with bias into higher end. Strategic investors can hold on to “long” entered at 5275/5175 (average at 5225) with trail stop at cost for 5575-5625. Fleet footed traders can buy weakness into 5275-5175 for 5450-5525. Any bullish cues in FY13 Budget will get the focus back into 5750/5950.
Have a great week ahead........................................Moses Harding
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