English version of column in Business Bhaskar - 17th September 2013

Need to shift priority to growth from Rupee, inflation and Current Account Deficit

The Indian markets have been volatile since US Federal Reserve’s (FED) signal of tapering of Quantitative Easing (QE) before end of 2013, which led to pull-out of FIIs from the Indian sovereign debt market. Before this pull-out, 10Y Indian Bond yield dropped sharply from 8.25 to 7.25% and 10Y US Treasury yields rose from 1.5% to 2.5%, which acted as trigger for FII’s exit. This opened up the risk financing the Current Account Deficit (CAD) through FII flows, exerting pressure on Rupee exchange rate. RBI reacted swiftly to this external danger by squeezing the liquidity and lifting the operating policy rate from Reverse Repo rate (of 7.25%) to a revised MSF rate of 10.25%, a technical 3% rate hike. The agenda was to arrest run-away weakness on Rupee at the risk of collapse in the Bond and Equity market. 10Y Bond yield rose sharply from below 7.5% into 9.5%, so was equity market pulling NIFTY down below 5200. Unfortunately, the measures focused to protect Rupee did not work in favour, instead pushing the Rupee down from 57 to 69. The strategy to protect Rupee turned out to be growth destructive as GDP growth momentum fell below 5%, and most economists revising the FY14 GDP growth target to 3.5-4.0% as against Budget estimate of 6.5%. The lack of optimism on the way forward did shake up the confidence of the stake-holders as RBI came up with administrative stricture to tame the Rupee through Sell/Buy FX swap window for Oil Marketing Companies and Buy/Sell swap window for Banks at 3.5% for 3-5Y tenor against similar tenor FCNR deposits. These actions brought relief in an otherwise bearish sentiment, and since then markets have been in consolidation mode with Rupee at 63-65, 10Y Bond yield around 8.5% and major beneficiary being the equity market where NIFTY rallied sharply from below 5200 to above 5900.

What is the root cause for extreme pessimism on the economic outlook? It is obvious that Growth momentum is very critical for economic (and markets) prosperity. The system is in extreme growth-inflation conflicts; high inflation considered as major risk to long term growth prospects. RBI did not have enough bandwidth for shift into growth-supportive monetary policy. Then, emerged Rupee-liquidity/interest rate conflict; RBI had to squeeze liquidity (and tighten short term money market rates) to protect inflation. The combination of both triggered growth-fiscal deficit conflict; risk of slippage beyond estimated FY14 fiscal deficit target of 4.8% budgeted against GDP growth target of 6.5%, with growth estimate slipping below 4%. All taken, the domestic macroeconomic factors have together emerged as serious risk to growth. RBI is running out of options and looks up to the Government to address supply-side bottlenecks and policy irritants to revive growth momentum. During this time, liquidity-led tailwind from external sector has shifted to strong headwind with fear of reverse flow of dollar liquidity from emerging markets to developed markets. The authorities were not prepared to handle the simultaneous combined resistance to growth from domestic and global cues. 

What is the remedy? RBI has to shift into growth supportive monetary stance despite risks from inflation, CAD and Rupee exchange rate. The major issue now revolves around the CAD and ability to finance the CAD through Foreign Direct Investments (FDI) and Non Resident Indians (NRIs). The structural issue of CAD has turned from bad to worse on significant increase in non-essential imports such as Gold, consumer durables etc and higher consumption of essential imports such as Oil and other commodities. This has resulted in export of permanent capital from India (to fund trade deficit) being funded by short term-hot money FII inflows. The immediate option is to reduce consumption of essential imports (to be achieved through pass-through of subsidies), cut consumption of non-essential imports (higher duties and anti-dumping laws), expand exports from services sector to manufacturing, commodities and agriculture and bridge CAD through long-term FDI investments. The Government should immediately address to revive struck infrastructure projects where huge investments are locked in. The policy irritants relating to land acquisition, legal, labour etc needs to be addressed to revive consumption and investment. The results may not be seen in the immediate future and would be a long-drawn process to address these structural problems. Till then, short term remedial measures are needed to revive the long term confidence on the Indian economy and its growth story.

What are expectations from mid-term policy review on 20th September? RBI has shifted its monetary policy from balanced approach to hawkish stance to support Rupee, but these measures have turned out to be growth destructive without any positive impact on Rupee. RBI is expected to shift its stance back to balanced approach between growth versus inflation/CAD/Rupee exchange rate. While RBI is expected to remain steady on policy rates, it is essential to drive call/short term money markets rates down from over 10%. To this effect, RBI would allow higher refinance facility at Reverse Repo rate (of 7.25%) and the balance at MSF rate (of 10.25%); 50:50 mix of refinance will drive call money rates from 10.25% to 8.75%. This stance will revive sentiment and improve the lack of optimism on the way forward. There would be relief rally in shorter tenor Fixed Income market while 10Y Bond stays steady at 8.0-8.25%. An improved confidence on growth will set up bullish momentum in the equity market driving NIFTY above 6000 while allowing stability in Rupee at 62-65. Rupee stability at said higher base of 62-65 is essential to control imports, support exports and to attract off-shore flows into India. The economy (and markets) has escaped from a serious crisis but not yet out of the trouble. It would need aggressive measures jointly from the Government and the RBI to get the investor’s confidence on Indian economy. The key factors to watch for Indian economic prosperity are the trending in investments and growth; while stability in inflation, twin deficits and Rupee exchange rate will add momentum and turn catalyst to growth. It is long way to go but a quick beginning to be made to avoid set-up of yet another crisis which can cause irreparable damage!

Moses Harding

Business Standard Column - 17 September 2013

Rupee protection not at risk of growth destruction

It is time for monetary policy to stay supportive for growth; sustainability of GDP growth below 5% will emerge as serious threat to Indian economy (and markets). Having said this, all domestic macroeconomic cues continue to stay resistive to growth; high retail inflation, uptrend in wholesale inflation, pressure on current account deficit, risk on fiscal deficit, sharp depreciation in rupee, sluggish investments, supply-side bottlenecks etc., do not support shift into aggressive growth supportive monetary policy stance. On the other hand, the tight liquidity and elevated money market rate curve in the shorter end, as strategy to address Rupee exchange rate (and CAD) has not yielded desired results. Taking all these together, the best fit is for RBI to take a balanced approach between growth and inflation, Rupee and liquidity while putting pressure on the Government to remove supply-side bottlenecks and remove policy irritants to revive consumption and investment.

The stake-holder’s confidence on the way forward is weak given the pipe-line political risks from ensuing elections. The new RBI Governor has begun the task well bringing in some kind of relief into the near term. What the system needs now is follow-on measures (and actions) to set up a firm launch pad for strong recovery in GDP growth momentum back into FY14 Budget estimate of 6.0-6.5%. This is the one-point factor to get the economy (and markets) into bullish momentum. The recent IIP print signals formation of turn-around signals in growth while inflation data print provides little comfort on sustainable reversal with pipe-line pressure from fuel and primary articles. The expectation from RBI is to stay focused on growth (as the most major risk to economy) while not diluting its efforts to control inflation and manage CAD (and Rupee exchange rate).

The new Governor is expected to stay pause on policy rates and SLR/CRR, but consider loosening its firm grip on liquidity and interest rates. There is immediate need to shift the operating policy rate from MSF into LAF, if not in full but with higher percentage at LAF so as to drive the call money rate from above 10% into 7.25-8.75% on higher liquidity support at LAF. The highly skewed (and inverted) money market rate curve needs to be reversed which will be bullish on rate and equity markets; resultant marginal pressure on the Rupee may be acceptable if it leads to 62-65 consolidation.  

Moses Harding

Good bye and best wishes to IndusInd Bank

5^th July 2013

Dear IndusIndian,

It is time to say “good bye” at IndusInd Bank to end my second innings on completion of a century (more than ten years from April 2003); the first one was a half-century (April 1994 to May 1999) being a member of the core start-up team of the Bank. Both the innings are entirely different in shape and style; first one was kind of Chris Gayle T20 stroke-play to establish the new Bank in the market place with a small balance sheet without track record. It was a very satisfying period when the Bank established a good brand (and firm foot-print) in financial markets in general and FX market in particular. IndusInd Bank was one of the leading “market maker” rubbing shoulders with the heavy weights in the FX & Money markets. The second innings was more challenging one like a test match; joined in April 2003 as Executive Vice President & Head of Treasury and International Division to ramp up operations, to increase productivity and enhance efficiency levels of the business unit. The add-on was setting up of Capital and Commodity Markets Division where the Bank emerged as one of the elite group as Bankers to major exchanges across equity, commodity and Currency markets and rolled out products to market participants across asset classes. Post merger of Ashok Leyland Finance with the Bank in 2004-2005, I was given additional responsibilities in October 2005 as Head of Wholesale Bank, merging the corporate and Institutional business with other responsibilities. It was a great experience in setting up various business units across clients and products with productivity and efficiency measures on each client/product facing feet-on-street sales force; each RM/PM was a portfolio by itself, measured against the NAV built from number of clients, number of product hooks and value of each client. The management of the then Balance Sheet with pressure on Capital and resultant adverse impact on productivity/efficiency parameters was a big challenge and a very tight-rope walk! It was more challenging and fruitful since the management change-over in 2007 when I was given the charge to scale up the business/revenues of Global Markets Group. It was highly satisfying stint building a strong team to ramp up business and revenues (from clients, trading and balance sheet management) with very low cost-revenue ratio, which I handed over charge in October 2011 to take up a new role as Head – ALCO and Economic & Market Research. The positive take-way during this period since November 2011 was the time and mind band-width I had to net work with external stake holders of the Bank through my research report MARKET PULSE. The time I spent in personal interactions with clients, Reserve Bank of India, press and media was indeed great personal satisfaction. All these achievements and satisfaction would not have been possible but for the great support that I got from my entire team and I will cherish these memories forever!

It is time now to part to explore challenging opportunities elsewhere during the last lap (and peak) of my professional career which began in 1981 with State Bank of India. The experience, expertise, skill sets, good-will, the brand and the network that I have built over three decades of presence in financial markets will be put to use in the domain of Banking/Finance/Investments/Financial Markets, which I will let you know in due course. Whatever path I may choose either full-time employment or otherwise, I sincerely solicit your best wishes, support and patronage in my new avatar.  Please stay in touch and feel free to communicate with me for any knowledge based inputs that you may need on financial markets. With heavy-heart and lot of emotions, I take leave of you for now with best wishes and good luck to take IndusInd Bank to greater heights. I thank each one of you for all the support that I got during my stay with IndusInd Bank for over 15 years.

Best regards

Moses Harding

E-mail: harding.moses@gmail.com

Blog: mosespeaks@blogspot.com

Twitter handle: mosesharding

Mobile: +919820334145

RBI's stance on 3rd May?

Tough for RBI to shift priority from inflation to growth

It is one of rare occasions when market stake holders are unanimous in demanding 25 bps rate cut from RBI. There are strong reasons for it; (a) headline WPI inflation is below 6% (b) core inflation is steady below 4% (c) inflationary build-up from twin-deficits are diluted (d) real interest rates not considered as major threat to savings, investments and flight of capital to non-financial assets and most importantly (e) need to step-up growth momentum from below 5% to above 6% to support fiscal consolidation. There has been a structural shift; fiscal consolidation is not seen as threat on inflation but growth pressures are emerging as threat for fiscal consolidation. All taken, there is need for RBI to shift its priority from inflation-control to growth-support and stay dovish on its monetary guidance. RBI’s concerns are from lack of policy reforms to spur growth and heightened political risk limiting the UPA Government in roll-out of reform process. The sustainability of current set-up of bullish cues is in doubt. There is no clarity from external cues as well; BRENT Crude and Gold has unwound most of its recent losses while turnaround signals in global economic recovery are not yet in sight. It may not be prudent for RBI to shift into loose monetary policy stance given these uncertainties. So, what to expect from RBI and its impact on markets?

RBI will deliver 25 bps rate cut and provide signals for some more limited space which should push the LAF corridor from  current 6.50-7.50% to 6.0-7.0% by end June 2013. So, it is a choice between front-loading of 50 bps rate cut now or phase it out in two stages; one on 3^rd May and next in June mid-quarter review. RBI may prefer to deliver in 2 lots sticking to its baby-step approach. The liquidity condition of the market is comfortable at around deficit of Rs.1 Trillion. The draw-down from LAF counter is mostly to refinance excess SLR book rather than to treat the same as overnight OMO bond purchases for credit expansion. While there is demand for CRR cut from most Banks (for bottom-line benefit), RBI’s preference is for SLR cut. The ideal situation with least impact on price stability will be for gradual move of CRR from current 4% to 3% and SLR from current 23% to 22% (total statutory holding down to 25% of NDTL). It may not be a surprise if RBI delivers cut in CRR or SLR or both aggregating to 50-100 bps to retain LAF drawdown within its comfort zone of 1% of NDTL deficit or surplus. These monetary actions will provide clear signals of RBI’s growth supportive stance and its comfort on soft-landing of inflation in the short term. It is important for RBI to stay neutral (to dovish) on its guidance; there may not be space for more rate cuts but option to shift system liquidity from deficit to surplus mode has room for fall in over-night rates by 1%. All told, monetary policy will stay supportive to growth (and asset markets) into the short/medium term.

The impact on asset markets will be neutral to mildly positive. There are no reasons to turn bearish given the dilution in conflict of play between growth-inflation dynamics. NIFTY should regain its pre 29^th January monetary policy high of 6111 for shift into short term trading range of 5800-6300. Rupee will stay bullish for recovery into post 29^th January monetary policy high of 52.88. It would position RBI to cover its earlier forward sale of dollars (at over $10 Billion), re-build its dollar reserves to earlier high of around USD 350 Billion and to maintain exchange rate competitive (and attractive) for exporters till economic recovery in western economies. RBI would be seen absorbing excess dollar supplies at/below 53.60-54.10. 10Y Bond has rallied sharply since September 2012 from 8.25% to 7.75%. While the medium/long term outlook is bullish subject to deliverables on various factors, near/short term outlook is neutral driven by demand-supply mismatch. The investor appetite for 10Y Bond at 7.60-7.75% may not be good when pipe-line fresh supplies are huge. The cut in HTM limit and resultant unwinding of long bonds will limit extended bull-rally in the Bond market. It is also in order for stability in 10Y Bond yield at 7.65-7.90% when overnight operating policy rate is expected to stay steady at 7% in the near/short term, thus building adequate tenor premium. The post-policy trading range is seen for NIFTY at 5800-6300; Rupee at 53.60-54.60 and 10Y Bond at 7.65-7.90. There are no strong cues for break-out either-way given the strong cross-winds in play; it would be period of consolidation in the short term while awaiting cues for directional guidance into medium and long term.

Moses Harding        

pre RBI monetary policy update

Need confidence boosters to revive bullish sentiment

The markets have gone through two phases since September 2012 change of guard at the Finance Ministry. Mr. Chidambaram promised policy reforms and fiscal consolidation; and markets gave thumbs up with hope and confidence on the way forward. NIFTY rallied from September 2012 low of 5215 to 6111 by end January 2013 by whopping 17% in 4 months. 10Y bond rallied from 8.25% to 7.80% for annualised return of over 24% and Rupee rallied from 56.03 to 52.88, up by 5.6%. However, the good fortune was short-lived and could not last beyond 4 months. Why the reversal of fortunes from end January 2013? The rally was built on hope that the worst is behind and delivery on fiscal consolidation will result in shift into favourable monetary conditions to attract investments and to build capacity expansion. RBI delivered the hammer in its 29^th January policy review by not signalling a soft monetary policy regime to support growth. RBI had reasons for it; with severe concerns on highly elevated Current Account deficit and retail headline CPI inflation. The markets reversed (to unwind most of recent gains from September 2012) pushing NIFTY down to 5540, 10Y Bond to 8% and Rupee to 54.90. What next? The markets lack clarity on immediate direction. The confidence of turnaround in macroeconomic dynamics is significantly diluted with political risks coming into the radar. Despite hanging on to minority coalition, the Government is seen to do its best on reforms and revival of infrastructure projects (and core sectors) which are critical to step-up growth momentum from below 5% to over 6%. Is this good enough to get back into bullish undertone? No. It would need RBI to do the rescue act. RBI is being pushed to the wall to shift its priority (and concerns) from inflation to growth. If it does by front-loading rate cut action and shifting system liquidity to surplus mode, then there will be a strong relief rally into levels seen in end January 2013. It is important for RBI to keep FIIs in play; if FIIs choose to exit, then it would take a long time to recover from the damage! What is the impact on markets till RBI’s actions? NIFTY is at risk of extending its weakness into post-Chidambaram low of 5215; and if FIIs choose to exit, then run-away weakness into 4770-5032 will be on cards. In the meanwhile, 10Y Bond finds solid support at 8% to post strong recovery into 7.90% on hope of FIIs shift of preference from equity to fixed income while USD/INR lost steam at 12M forward rate of 58.60-58.75 (high at 58.64 on spot at 54.89) for spot reversal into 54.60. What next? While we watch consolidation in 10Y Bond at 7.85-8.0% and USD/INR at 54.20/54.35-54.85/55.00, it is prudent to stay aside in equity assets. It is bit early to feel (and read) the pulse of RBI; a favourable stance from RBI will trigger rally in 10Y Bond below 7.78% (into 7.65%) and Rupee rally below 53.90 (into 52.90) while providing consolidation in NIFTY at 5800-6100. The strategy (into RBI’s annual policy) is to trade end-to-end of 7.80/7.85-8.0/8.05% (10Y Bond); Buy 1M forward dollar at/below 54.50 (spot at/below 54.20); sell 12M forward dollar at/above 58.60 (spot at/above 54.85) and stay away in equity assets allowing weakness into 5200-5400 to initiate strategic investments for relief rally into/above 5800.

Good luck.......................Moses Harding

Weekly report for 01-05 April 2013

MARKET PULSE: Weekly report for 01-05 April 2013

Comfort from Capital flows and better domestic fundamentals dilutes risks from elevated CAD

There are signs of nervousness from elevated Current Account Deficit (CAD); sharply up as percentage of GDP from 2.5-3.0% in 2008-2009 to 5.5-6.0% in 2012-2013. It is a combination of external and domestic cues that drove the CAD sharply up in 4-5 years; triggers are from bullish momentum in commodity prices, reduced external demand for India’s goods and services, higher consumption of subsidised essential imported commodities, risk-on investor environment pushing demand for non-essential imported commodities and contraction in domestic GDP growth. The sharp spike in CAD is not a surprise if we factor the changes in market (and economic) dynamics since 2008-2009; BRENT Crude is up from $36 a barrel to $125; Gold is up from $680 an ounce to over $1900 and GDP growth down from over 9% to below 5%. The pressure on CAD becomes worse on build-up of demand on trade imports while exports struggle to stay in business-as-usual mode. The impact is already felt in the system; tight system liquidity, elevated interest rates, high headline inflation and sharp fall in Rupee from 39 to 57.  The remedy has to be with combination of arresting imbalance in Trade Account, accelerating inflows from NRIs and off-shore investors, encouraging resident borrowers to access off-shore liquidity and ensuring rupee exchange rate stability through improvement in macroeconomic fundamentals to provide comfort (and confidence) to investors and borrowers to stay uncovered on foreign currency liabilities.

The Government is already working towards arresting demand for essential and non-essential imports through pass-through of subsidy and higher taxes while extending financial and non-financial support to exporters. Government is also on over-drive to attract inflows from NRIs through interest rate deregulation and rolling out red-carpet to FDI investors. All told, hot money flows from FIIs has helped to retain Balance of Payment in near surplus mode while high FX premium (and strong USD/INR at 54-56) continue to attract medium/long term dollar supplies from exporters/borrowers. While there are no quick-fix solutions to address the Trade imbalance, it is rather not difficult to address attracting inflows and achieving improvement in macroeconomic fundamentals leading to rupee exchange rate stability. The low-hanging fruits are (a) opening up leverage investments for NRIs and off-shore investors through attractive coupon rate (and removal of tax irritants) which would enable them to have cross-border asset-liability mismatch through liability leg in the off-shore and asset leg in the on-shore market; (b) increased access for resident borrowers to raise off-shore debt and (c) quick convergence of growth-inflation dynamics to turn monetary policy to support growth and fiscal consolidation. The worst is seen to be behind with consolidation in external factors and it is important to ensure exchange rate stability and remove risk of sovereign downgrade to bridge CAD with capital account flows till improvement is sighted in Trade account. All these factors have been factored into the exchange rate movements with strong support for the USD/INR at 53-54 and Rupee seen highly under-valued at 55-56. The break-out trigger of this range (of 53-56) will be on the outcome of steps taken to address CAD and retain positive Balance of Payment position at most times. Let not the importers/FC borrowers come in to hedge short/medium/long term foreign currency liabilities on fear of deterioration in CAD and the resultant run on the Rupee!

Exchange rate market:

USD/INR is in consolidation mode at 53.90-55.15. The strategy of MARKET PULSE was to cover 3M-10Y dollar assets/receivables above 55 and to cover 15-30 days liabilities/payables below 54. Given the consolidation mode of USD/INR, it is not considered prudent to pay high premium to acquire forward dollars beyond 1-3 months. This strategy covers USD/INR trading range at 53-56 in 2013 (already seen high of 55.38 and low of 52.88), thus giving enough time and scope to cover related market risks in FC assets and liabilities. What next? The base for USD/INR is already lifted to 53.90-54.05 (from earlier 52.90-53.05) duly pricing-in the macroeconomic fundamentals and the need for RBI to acquire dollars (and release rupees into the system) to balance inflation risks while retaining export competitiveness. On the other side, 55.10-55.35 is seen as the worst case for Rupee building space for improvement in fundamentals and high valuation of the dollar beyond 3M tenor. All taken, there are no strong reasons to act on the elevated Q3 CAD data print. For the week, let us watch consolidation at 54.20/54.35-54.85/55.00; test/break either-way will be excessive, hence not to sustain. MARKET PULSE readers are already covered in end April imports at/below 54.50 and in end June exports at/above 55.50 post the unwind of entire “short dollar” book at/below spot 54.10. It is now good for exporters to cover 6M exports at 54.60-54.85 (end September at/above 56.50); 12M exports at 54.90-55.15 (12M at/above 58.50) and 1 year-10 years (exports and shift of rupee loans into dollars) on extended rupee weakness beyond 55.15. There is no need for importers to panic till 55.15-55.40 is safe but stay covered on near term (7-30 days) on rupee gains into/below 54.15-54.40.

EUR/USD is in consolidation mode at 1.2750-1.2850 within set near term trading range of 1.2650/1.2750-1.3050/1.3150. The cues from the Euro zone are negative while economic recovery is being formed in the US zone thus extending rally in the USD Index from below 82 to above 83. For the week, let us watch consolidation at 1.2650/1.2750-1.2950/1.3050 with no strong cues to suggest break-out either-way. Having said this, bulls will be worried on extended weakness below 1.2650 which will then open up 1.2050 into the radar while there are no clear evidences to look for sharp rally beyond 1.3050-1.3150 at this stage.

USD/JPY is in consolidation mode at 93/94-95/96 post the sharp rally from 91 into 97. MARKET PULSE continues to retain its short term bullish undertone for 99-100 while above 93.00-93.50 preparing steam to take out 94.75-95.25 which is the trigger for extended gains beyond 96.50-97.00 into set short term objective at 99-100. The strategy is to trade end-to-end of 93.00/93.50-94.75/95.25 and to build “strategic long dollar book” for eventual rally into 99-100. There is minor risk of extended weakness below 93 to open up 90-91 before up again into 96-97.

Interest rate market:

10Y Bond has now completed end-to-end of 7.78-7.83 and 7.98-8.03. MARKET PULSE strategy was to sell 10Y (and beyond) at 7.78-7.80 and switch into 1-3 years to cut duration of the investment portfolio and to realise profits ahead of financial year end with intent to re-build investment book with longer tenor portfolio at 7.98-8.03 in preparation for movement in Repo rate to 7.0-7.25% during H1/FY14 to drive 10Y Bond yield to 7.60-7.75%. The end-to-end move has been rather swift as 10Y Bond fell from 7.78% (26/2) to 8.0% (26/3) in one months’ time. MARKET PULSE continues to stay with short term trading range of 7.65/7.70-8.0/8.05 factoring in demand-supply mismatch, investment appetite for fixed income assets, attractive “carry” on funding from LAF/CBLO counters and monetary policy actions. The strategy is to stay invested at 7.98-8.0 and 8.03-8.05% for near term objective at 7.80-7.83 and thereafter into 7.65-7.68%. If all goes well on macroeconomic fundamentals in H2/FY14 giving monetary bandwidth for RBI to shift the operating policy rate from higher end to lower end of LAF corridor, Bonds will extend its bull phase below 7.60-7.65 into 7.0-7.25%. FY14 is seen attractive for Bond (and fixed income) investments building space for 35-75 bps upside gains in the 10Y with limited downside risks (with stop above 8.07%); minimal risks with significant reward! For now, let us allow consolidation at 7.88/7.90-7.98/8.0 with test/break either-way to attract.

OIS rates into strong 1X5 play; 1Y rate is down from 7.65 to 7.45 and 5Y up from 7.13 to 7.28. MARKET PULSE strategy was to trade build-up of steepness in the 1X5 curve with 1Y received book at 7.60-7.65 and 5Y paid book at 7.10-7.15 with strategy to unwind at 7.45-7.50 and 7.28-7.33. All these have happened in matter of one month since mid February. The short term trading range is now seen at 7.15/7.25-7.50 (1Y) and 7.15-7.25/7.30 (5Y); meeting point for 1 and 5Y rate is expected to be somewhere at 7.25-7.30%. The strategy therefore is to build 1Y received book at 7.48-7.53% (for 7.30/7.10) and trade end-to-end of 7.15-7.25% in 5Y.   

FX premium is sharply down on spot date shift into FY14; 3M is down from above 8% to 7.5% and 12M marginally down from above 6.85% to 6.70%. While the bullish interest rate play stands diluted, exchange rate play will exert bearish momentum with objectives at 7% and 6.4% respectively. The strategy is to retain “received book” entered at above 8% (3M) and 6.85% (12M), add at 7.65% and 6.75% while watching trading ranges at 7.00/7.15-7.60/7.75 (3M) and 6.40/6.50-6.75/6.85 (12M).

Equity market:

NIFTY held at 5585-5610 short term support zone (low at 5605) to complete its reversal journey from above 6100 (high at 6111) in two months’ time. This completes end-to-end of set short term trading range of 5600-6100. The strategy of MARKET PULSE was to completely unwind investments at/above 6100 allowing sharp correction into 5600-5650. The cues are mixed with no signs of strong momentum to get into firm trend either-way. The risk factors are from domestic cues while strong FII appetite is retained, but weak macroeconomic fundamentals and lack of appetite from domestic investors keep downside risks (below 5600) in the radar. The investment appetite for domestic investors are strong in Fixed Income assets and there are no signs of shift of investments from Bonds to Equities in the near/short term as investors stay in wait for RBI’s 25-50 bps rate move for exit. Given these factors in play, it may not be easy to extend gains beyond 5850 into 5950-6100 in the near/short term. The near term trading range is seen at 5550/5600-5850/5900; test/break either-way is not expected to sustain. There is no great confidence to build strategic investments at this stage, hence prefer to stay fleet-footed trading end-to-end with tight stop on break thereof.

Commodity market:

Gold is in consolidation mode at 1590-1610 post the sharp fall from 1610 to 1555 and decent recovery thereafter. The cues are mixed between general dollar strength (against major currencies) and uncertain cues from the Euro zone as investors are unable stay firm either on risk-on mode or risk-off mode. MARKET PULSE preferred short term consolidation at 1500/1550-1650/1700 and have seen high of 1695 and low of 1555 so far and there are no strong cues to review this set short term range. In the immediate term Gold should stay below 1610-1620 resistance to retain its medium/long term bearish undertone for reversal into 1550-1500 to pull 1300 into the radar. For now, let us watch consolidation at 1560/1575-1605/1620 and await cues to build break-out bias.

NYMEX Crude extended its rally from 89.50-90.00 support (low at 89.33) into strong resistance at 97.50-98.25 (high so far at 97.80). The tone is bullish for extended gains above 98.25 to pull 100.42 into the radar to complete 100% recovery of recent fall from 100.42 to 89.33. At this stage, there are no major risk factors to prefer extend rally into 105-110. The near term trading range is now seen at 94.50/95.00-97.75/98.25 not ruling of break of 98.25 for deeper extension into 100.00-100.50 which should hold. The strategy is to buy on dips for the said rally while strategic players can look to sell in two lots at 98.00-98.25 and 100.00-100.25 (with stop at 100.50) for reversal into 90 to set up short term trading range at 90-100.

Have a great week ahead.................................Moses Harding

Weekly report for 25-29 March 2013

MARKET PULSE: Weekly report for 25-29 March 2013

Political uncertainty and limited monetary support dilutes confidence

The Indian economy (and its asset markets) encounters strong headwinds from all sides, hurting the investor sentiment and confidence. The Euro zone crisis strikes back through Cyprus and there is fear of more in pipe-line. There is absolute lack of confidence in the economic recovery of Euro zone with struggle to stay afloat. On the domestic front, RBI maintains its hawkish monetary stance. The stake-holders anticipated RBI to be more concerned on growth taking comfort from sharp down-trend in headline WPI and core inflation. The hope was built on the presumption that RBI will shift into loose monetary policy stance in recognition of shift into tight fiscal policy stance. It is obvious that sustainability of tight fiscal policy is dependent on quick shift into higher growth trajectory. It is not that it is possible only with favourable monetary conditions (of low interest rates and surplus system liquidity) but it will definitely be a catalyst to the process. The bolt from the blue is the political uncertainty building doubts over the ability of minority UPA to roll-out key reforms covering FDI limit enhancement in select sectors, tax (and land) reforms and more importantly igniting the pick-up of infrastructure (and core) projects. The market is not expected to get into bullish mode unless the fiscal consolidation is achieved through growth pick-up and not through cost compression. Government’s disinvestment process (for one-off revenues) has limited appetite from investors and the bail out from PSU FIs is not seen in good light. All told, dynamics are very complex at this stage with strong cross-winds inhibiting combined strength of political, fiscal and monetary forces come into play for lifting the growth trajectory in FY14. What is the impact on markets?

Exchange rate market:

Rupee derives comfort from good off-shore flows and elevated FX premium despite pressure from high Current Account deficit and weak macroeconomic fundamentals. There is no clear trend at this stage given the cross-winds. USD/INR finds strong support at 53.90-54.05 attracting importers’ interest to cover 1M dollar liabilities (April’13 dollars at/below 54.50) while 54.40-54.55 seen good to cover 3M exports (June’13 dollars at/above 55.50). The down-side risks to rupee (beyond 54.55 into 54.80/55.15) will be from FII pull-out and warning signals from rating agencies if economic data prints do not provide comfort on growth, inflation and twin-deficits. On the other side, it is prudent to arrest extended rupee gains beyond 53.90 (into 53.65) to retain export competitiveness and RBI using this opportunity to build dollar reserves to release pressure on tight system liquidity. The trading range for rest of 2013 is seen firm at 53.65-55.15. USD/INR has been volatile in 2013; 55.38 to 52.88 to 55.15 to 53.89 and now there is risk of move into 54.80-54.95 while 53.90 stays firm. In the absence of favourable trending in macroeconomic indicators, intra-2013 low of Rupee at 55.38 will be at risk, while it would need dramatic turnaround in confidence to trigger rupee gains below 53.89 into intra-2013 high of 52.88. The hedging strategy for 2013 (and FY14) should reflect these expectations. For the week, let us watch consolidation at 53.90/54.05-54.40/54.55. The hedging strategy is to stay covered on imports due till April’13 (end April’13 dollars at/below 54.50) and consider good to sell 3M exports (end June’13 at/above 55.50). Exporters can await higher spot to cover 6M exports (end September’13 at 56.60-56.85) and 12M exports (end April’14 at 58.50-58.75) while importers extend coverage to 1-3M on rupee gains into 53.65-53.90.

EUR/USD sharply down into 1.2850 (from 1.3100-1.3150) post fresh issues from the Euro zone and thereafter got into consolidation mode at 1.2850-1.3000. In the meanwhile USD Index traded in consolidation mode at 82-83. The undertone is weak which can run deep into lower end of set near term range of 1.2650-1.3150 with USD safe-haven preference driving the Index into/above 84. For the week, let us watch consolidation at 1.2850/1.2925-1.3075/1.3150. The strategy is to trade end-to-end while staying neutral on break-out into 1.2650 or 1.3350. The near term trading range is seen at either 1.2650-1.3150 or 1.2850-1.3350.

USD/JPY was in consolidation mode at 94-96 post the sharp recovery from 91 to 96.71. The bullish undertone is retained on BOJ monetary/financial support for eventual move into 100. BOJ will work to retain JPY weakness into short/medium term to support economic recovery.  For the week, let us watch consolidation at 93/94-96/97. The strategy is to trade end-to-end while staying prepared to build strategic “long” book at 93-94 for 99-100.  

Interest rate market:

10Y Bond is down from 7.78-7.80% to 7.96-7.98% despite delivery of expected rate cut and assurances on OMOs (without delivery of CRR cut). It is not very negative per se but the tone of monetary policy and fear of demand-supply mismatch on shift into FY14 triggered the fall. MARKET PULSE strategy was to unwind “long bond” portfolio (10Y and beyond) at 7.78-7.80%, cut duration of the portfolio by shift into 1-3 year tenors in anticipation of sharp reversal for buy back in 3 lots at 7.93-7.95, 7.98-8.0 and 8.03-8.05 which would then complete end-to-end of set short term range of 7.80-8.05%. For the week, let us watch 7.90/7.93-8.0/8.03 with bias into higher end. Strategic players can retain “long book” entered at 7.95-7.98%, and await 8.00-8.05% (for the third and final lot) while enjoying the “carry” of minimum 45 bps against LAF/CBLO. Need to carry this portfolio with patience; it is similar kind of chase that MARKET PULSE made from 8.20-8.25 to 7.78-7.83. This time the chase is expected to be from 8.00-8.05 to 7.65-7.75% building 25-50 bps rate cut in April-June 2013, setting up short/medium term range play at 7.65/7.75-8.0/8.05%.

OIS rates remained firm; 1Y up from 7.50 to 7.55% but 1X5 steepened to push 5Y from set pay zone of 7.10-7.13% into 7.28-7.30% in quick time. We continue to watch the set short term range of 7.35-7.60 (1Y) and 7.10-7.35% (5Y); test/break either-way is not expected to sustain. For the week, let us watch 1Y at 7.53-7.58% and 5Y at 7.22-7.30%. The strategy is to switch sides by initiating “received book” in 1Y at 7.58-7.60% and in 5Y at 7.30-7.35%; there are no major cues to trigger break-out of the set short term trading range of 7.35-7.60% (1Y) and 7.10-7.35% (5Y). The strategy to receive 1Y at 7.57-7.60% and pay 5Y at 7.10-7.13% has worked well and it is time to retain 1Y received book and unwind 5Y paid book at 7.28-7.33%.

FX Premium remained firm to hit 8.0-8.10% (3M) and 6.70-6.75% (12M) to complete the move from 7.60% and 6.40% respectively. The strategy was to unwind “paid” book and switch to “received book” at/above 8% in 3M and at/above 6.7% in 12M. For the week, let us watch 7.75-8.0% (3M) and 6.50-6.75% (12M) with bias into lower end on shift of spot date into April. The strategy is to hold “received book”, add at 7.90-8.0% in 3M and 6.70-6.75% in 12M for near term objective at 7% and 6% respectively.

Equity market:

NIFTY completes end-to-end of 5600-6100 near short term range; down from 6111 to 5631 in less than 2 months and weekly close at 5651 is bearish. The trigger is from combination of weak domestic and global cues with lack of support from domestic investors. Despite this sharp fall of 8% in 2 months, FIIs are seen with patience to stay invested. The undertone is neutral only for the reason that NIFTY is trading at lower end of set short term range of 5600-6100 and can gain steam to set up relief rally into 5850. The strategy of MARKET PULSE was to absorb weakness into 5600-5650 with tight stop for this relief rally but the recovery from 5631 could not take out 5700 which is major worry. For the week, let us watch 5550/5625-5825/5875; extension into outer corridor will attract good interest. It will be very bearish below 5550 which could trigger FIIs exit. All taken, there are no strong cues to build strategic investments till some positive surprises emerge from political, fiscal and monetary dynamics.

Commodity market:

Gold extends its relief rally from 1560 to 1615 getting its shine back from Euro zone worries. The tone is mildly bullish for extension into 1685 to retain set short term range play at 1500/1525-1675/1700. MARKET PULSE preferred formation of short term base above 1500-1525 (low at 1554.50) for consolidation play into 1605-1620 (high at 1616) before getting back to bearish trend for 1300. Gold is down from 1800 since October 2012 to 1550 in 4 months and resultant shorts squeeze with combination of risk-off sentiment from the Euro zone has provided relief rally into set reversal objective. For the week, let us watch consolidation at 1585/1600-1635/1650. Strategic investors can look to sell at 1650-1700 for reversal into 1500-1550.

NYMEX Crude completes end-to-end of set near term range of 89/90-94/95 (low at 89.33 and high at 94.09) and there are no strong cues to suggest break-out of this range. For the week, let us continue to watch consolidation at 91.00/91.50-94.50/95.00. Strategic investors can look to build “short” book in two lots at 94-95 and 97-98 (with stop at 98.50) for 89.50/85.50,

Have a great week ahead.................................Moses Harding

No surprises from RBI but no comforting signals

Caution on inflation and comfort on growth is bearish on markets

RBI delivered to expectation on policy rates, and not delivering CRR cut is not relevant to markets with option to release liquidity through Bond/USD purchases. RBI has already absorbed excess dollar supplies (to release rupees) on recent rupee rally from 55.15 to 53.90. RBI has ensured to retain post-policy price stability through its neutral stance on the way-forward. There are no signals of its comfort on inflation or concerns on growth! The balancing act between growth-inflation dynamics continues to be on stage!

The cues into the way forward are mixed. RBI has chosen to avoid sending bullish signals at this stage. The die-hard bulls expected RBI to exhibit its comfort on inflation and concerns on growth. So, bulls are disappointed. On the other hand, RBI has retained the declining interest rate cycle creating space for 25-50 bps rate cut before June 2013. This should provide comfort to bulls absorbing excessive weakness from now on. Over all, there is no shock or awe feeling post-policy as RBI continues to watch developments in global and domestic factors to shift bias from inflation to growth! It is worry that RBI is not yet prepared to walk along with the FM despite best efforts to dilute risks (on inflation) from policy reforms, fiscal consolidation and Current Account deficit. RBI is doing its bit to dilute the risk on growth from monetary conditions; but given the large appetite, the dosage is not seen to be enough! Hence, the bearish set up on asset markets post-policy!

Markets are expected to stay in consolidation mode; NIFTY at 5650/5750-6000/6100; USD/INR at 53.60/53.85-54.35/54.60 and 10Y Bond at 7.80/7.83-7.92/7.95. The strategy is to absorb post-policy weakness into 5650-5750; 54.35-54.60 and 7.92-7.95% for possible near term rally into 6000-6100; 53.60-53.85 and 7.80-7.83.

Moses Harding  

Weekly report for 18-22 March 2013

MARKET PULSE: Weekly report for 18-22 March 2013

Exchange rate market:

USD/INR reversed quickly into the set first reversal objective of 53.95-54.05 (low at 53.97) from sell zone of 55.10-55.35 (high at 55.15), and traded end-to-end of set intra-week range of 53.95/54.10-54.55 (high at 54.52/low at 53.97) before close of week at 54.02. MARKET PULSE urged exporters to stay covered in 3-12M exports (3M at/above 56.00 and 12M at/above 58.50 on USD/INR rally over 55.00 where USD is over-valued) and borrowers to shift rupee loans to dollars to encash higher spot and attractive FX premium. In the intra-week update (on the Twitter), exporters were urged to sell April’13 dollars at/above 55 on spot rally into 54.45-54.55. So, exporters would stay comfortable on Rupee rally from 55.15 to 54.00 while it is great relief for importers who stay open on FC liabilities (post unwind of hedge entered at 52.85-53.10) deriving comfort of short/medium term USD/INR consolidation at 53-55. What next? The undertone of Rupee is bullish; downside risks from twin-deficits and fear of rating downgrade is not relevant while stable commodity prices and RBI’s shift to growth supportive monetary stance add to bullish momentum. There is greater comfort now on sustainability of off-shore flows into Indian debt and equity capital market. The high forward premium continue to keep forward market in supply driven mode; importers do not have the fear (of rupee depreciation) to pay high premium to acquire forward dollars while exporters are in greed to absorb high premium (with comfort on rupee stability). The trading range was reviewed on 15^th March with set up of strong resistance at 54.05-54.20 for extended rupee gains below 53.93 into 53.60 to completely unwind the post-budget dollar rally from 53.60 to 55.15; beyond there, pre-January monetary policy high of 52.88 is pulled into the radar. For the week, let us watch 53.60-54.10/54.25 with bias into lower end. The strategy is to chase rupee gains into 53.60-53.70 (with trail stop above 54.25) and stay neutral on extension into 53.20-53.35 or correction from there into 54.05-54.20. It will be good for importers to absorb extended rupee gains into 52.85-53.35 where dollar will look cheap to acquire. It is good opportunity for RBI to absorb excess dollar supplies without hurting the rupee bullish tone. The near/short term undertone is firmly in favour of rupee for consolidation at 52.85/53.10-54.10/54.35. The only risk factor is from disappointment from RBI which will quickly get the focus into 55.10-55.35 (not a preferred scenario).

EUR/USD traded “inner ring” of set weekly range of 1.2885-1.3085 (low at 1.2910 and high of 1.3107) before close of week at 1.3080, while USD Index failed to retain gains above 82.85-83.00 (high of 83.16) for sharp reversal into 81.85-82.00 (low of 82.05) before close of week at 82.12. What next? The ability of EUR/USD to hold at near/short term base of 1.29-1.30 provides confidence to the bulls for strong push into 1.34-1.35. EUR/USD will find solid support at 1.2985-1.3035 and need to take out immediate resistance at 1.3140-1.3165 (USD Index at 81.45) for extended gains into 1.34-1.35. For the week, let us watch 1.2985/1.3035-1.3310 with bias into higher end not ruling out extended gains into 1.34-1.35 to complete end-to-end of set near/short term range of 1.29/1.30-1.34/1.35. The strategy is to stay “long” on dips into 1.3035 for 1.3285-1.3310.

USD/JPY traded end-to-end of set intra-week range of 94.75/95.25-96.50/97.00 range (low at 95.06 and high at 96.71) before close of week at 95.30. What next? The rally from 90.92 is losing steam below 97 and seen to be in consolidation mode before extending gains into 100.00, retaining near/short term bullish undertone while bulls need to take cover on test/break of immediate support at 94.55-94.80. For the week, let us watch consolidation at 94.50/94.75-96.50/96.75 and neutral on break-out direction. The strategy is to trade end-to-end with stop/reverse which then could bring the focus into 89/90 or 99/100.

Interest rate market:

10Y Bond found solid support at intra-week weakness into 7.90% but unable to extend gains beyond 7.83% for close of week at 7.85%. Post entry into 2013, 10Y Bond has settled into familiar trading range of 7.78/7.80-7.90/7.92 and has traded back-and-forth many times since then. What next? 10Y Bond has strong support at 7.90-7.93% irrespective of RBI’s rate action, while the uncertainty is on the near/short term objective. There is strong resistance at 7.78-7.80% which covers 25 bps rate cut (operating policy rate at 7.5%) but given the expectation of Repo rate at 7% by end June/September 2013, 10Y Bond can extend gains into 7.50-7.65% in the short/medium term. For the week, let us watch 7.70/7.80-7.88/7.90% with bias into lower end; 25 bps rate cut will provide consolidation at 7.80-7.88/7.90 while 25 bps rate cut with dovish guidance or 50 bps rate cut will guide the trading range at 7.70-7.80%. The strategy is to retain “long” book entered at 7.88-7.93%, add at 7.88-7.90% for 7.78-7.80% (on 25 bps rate cut) or 7.70-7.73% (on 50 bps rate cut).

OIS rates ease from set resistance/receive zone of 7.58-7.60 (1Y) and 7.23-7.25 (5Y) and met reversal objectives at 7.51-7.53% and 7.16-7.18% before close of week at 7.52% and 7.17% respectively. What next? The market has priced in 25 bps rate cut (Repo rate at 7.5%) but given the expectation of 7.25-7.0% soon, the trend is bearish for 7.35% (1Y) and 7.10% (5Y). For the week, let us watch 7.35/7.45-7.53/7.55 (1Y) and 7.10/7.15-7.20/7.23 (5Y) with bias into lower end; 25 bps rate cut will provide consolidation at 7.45-7.55% and 7.15-7.23% while 25 bps rate cut with dovish guidance or 50 bps rate cut will guide trading range at 7.35-7.45% and 7.10-7.20%. The strategy is to receive 1Y at 7.53-7.58% (for 7.35-7.38%) and receive 5Y at 7.20-7.23% (for 7.08-7.10%).

FX Premium in consolidation mode at 7.60-7.85% in 3M and 6.40-6.65% in 12M before close of week at 7.8% and 6.5% respectively. It was mixed cues with strong bids from interest rate play against strong supplies from exporters across all tenors beyond 1M. What next? It is time to build “received book” ahead of rate cut and shift into FY14 with near/short term objective at 7.0% and 6.0% respectively. In anticipation of this 1X12M has established reversal trend but good support has emerged from exchange rate play tracking USD/INR weakness from 55.15 to 54.00. For the week, let us watch 7.60-7.90/8.0% (3M) and 6.35-6.60% (12M). The strategy is to receive 3M at 7.90-8.0 and 12M at/above 6.60% and await test/break of lower end into set objectives.

Equity market:

NIFTY was in volatile mood with initial fall from 5971 to 5791, followed by sharp recovery to 5945 but lost steam for deeper correction into 5861 before close of week at 5872. The only clarity was from establishment of strong resistance at 5925-5975 till RBI’s policy is out of the way. What next? The near term trading range is firmly established at 5600-6100 and attention is on RBI to provide guidance for immediate term bias. The global cues and off-shore support are in favour of the bulls. On the domestic front, bearish signals from macroeconomic fundamentals are diluted but domestic institutional investors are glued to the fixed income with attractive coupon, less volatility and decent rally in the immediate term. RBI’s rate actions (and dovish guidance) will favour upside break-out to get the focus into 6200-6215 ahead of 6338-6357. For the week, let us watch 5765/5835-5945/6015; 25 bps rate cut (with dovish guidance) will get the focus into 5945-6015 and 50 bps rate cut will trigger extended rally into 6100/6215. The possibility of disappointment from RBI will be very bearish for 5600, pulling in risk of FIIs exit (not favoured at this stage). The strategy is to stay “long” on dips into 5765-5835 for 5945/6015 or 6100/6215.

Commodity market:

Gold extended its correction mode from 1560 into 1600 and into consolidation mode at 1575-1600 before close of week at 1592. What next? The tone is mildly bullish for extension into 1605-1620 while 1560-1575 stays firm. There is no clarity at this stage to establish break-out direction. For the week, let us watch consolidation at 1560/1575-1605/1620 and stay neutral on break-out direction. The strategy is to trade end-to-end with tight stop/reverse on break thereof.    

NYMEX Crude extended its gains from 89/90 (low at 89.33) into 94/95 (high at 93.84) before close of week at 93.45. What next? The weekly close above 93.37 is bullish and extended rally beyond 94.45-94.95 will open up 98.00-98.15. For the week, let us watch consolidation at 92.00/92.50-94.50/95.00. The strategy is to trade end-to-end with tight stop/reverse for 89.50 or 98.00.

Have a great week ahead.......................................Moses Harding          

RBI's monetary policy stance on 19th March 2013

RBI is seen obliged for shift into dovish monetary policy stance

There is unanimous expectation of 25 bps cut in policy rates and CRR on 19^th March mid-quarter review of monetary policy, but what is more relevant is RBI’s policy tone (and guidance) for shift of its priority (and support) to growth with good comfort on moderation in inflation. The disappointment on 29^th January is still in memory; despite delivery of cuts in policy rates and CRR, hawkish guidance on the way forward set the bearish tone on markets for post-policy collapse of 10Y Bond from 7.78% to 7.93%, NIFTY down from 6110 to 5850/5650 and Rupee down from below 53 to above 55. However, post-Budget FY14 optimism (and confidence on the way forward) has provided stability to markets, and the attention now is on RBI for directional guidance. There are good reasons for RBI to shift its concerns from inflation to growth, and to set the monetary conditions as catalyst to growth and fiscal consolidation.

·       The Government has delivered on fiscal consolidation and policy reforms. The commitment to contain fiscal deficit at 5.2% for FY13 and high confidence to achieve 4.8% for FY14 means that the Government has tightened the screws on the loose fiscal policy. The Government is on over-drive to remove policy-irritants and roll-out new reforms to attract foreign and private investments for revival of core sectors and capacity expansion of the economy. Global rating agencies have responded positively on Government’s efforts to address their main concerns on policy paralysis and fiscal consolidation, but remain suspect on growth aspiration. The risk of sovereign rating downgrade is no more a risk factor, but restoration of stable outlook (and rating upgrade) is dependent on achieving FY14 GDP growth target of 6.5% and prepare for step-up into 7.0-8.0% in FY15.

·        The Government is doing its best to address issues related to the Current Account Deficit. The measures to cut consumption of essential imports (through removal of subsidies) and discourage import of non-essential consumption are steps in the right direction. In the interim, efforts are on to attract FDI/FII flows to fund the current account deficit to dilute its impact on the rupee exchange rate. The impact is already visible with expectation of monthly CAD at $10-15 Billion which can be easily bridged through capital account flows and “lead” of dollar supplies from exporters. CAD and weak rupee are now not seen as risk to inflation.

·       The Government’s delivery on fiscal deficit (and consolidation) is highly dependent on stepping up the GDP growth momentum from below 5% (FY13) to above 6.5% in FY14. This will be difficult to achieve without strong tailwinds from favourable monetary conditions of low interest rates and surplus system liquidity. The UPA regime has the agenda to achieve higher growth trajectory (at moderate inflation) before 2014 general election.  

At this stage, twin-deficits (and Rupee exchange rate) are not seen as major risks on inflation. RBI should ensure that monetary conditions do not remain as risk to growth, and to align the monetary policy to reflect tight fiscal policy. It is not in the interest of the economy if tight fiscal policy and tight monetary policy co-exist.  

• The only irritant for RBI is from elevated CPI inflation and double-digit inflation of food, fuel and essential items linked to basic consumption. While nothing much could be done to address this through monetary policy, Government is seen to guide soft-landing through squeezing the demand-supply gap.
• RBI should derive comfort from sharp decline in core inflation to below 4%; huge gap between core inflation and headline print create good space for monetary easing even at the cost of marginal uptrend in core inflation.
• Tight system liquidity and lag in deposit growth will dilute monetary easing impact on the deposit/lending rates. It means that even an aggressive reduction of 75 bps in the operating policy rate, impact on savings/investments may not be significant, thus giving a good balance to growth, savings, investment, consumption and inflation dynamics.

Given these dynamics in play at this stage, there is strong case for RBI to cut the operating policy rate from current 7.75% to 7.0% and CRR from 4.0% to 3.0%. If the need to turn the monetary conditions to pro-growth is valid, it would be prudent to front-load the action rather than taking baby-steps! MARKET PULSE sees merit (and prudence) in RBI delivering 50 bps cut in policy rates and CRR to drive the 3-12M deposit rate at 8.0-9.0%, and to maintain drawdown from LAF counter at reporting fortnight average of Rs.50K Crores. While stability in money market rates will provide balance to the interests of investors and borrowers, rally in asset markets will add to confidence of stake holders. The resultant accelerated foreign currency inflows and supply-driven mode in the forward market would get RBI into the act of arresting rupee appreciation, thus easing the pressure on domestic system liquidity through aggressive dollar purchases. The remedy to expand system liquidity is either through expansion of RBI’s balance sheet or dollarization of its assets. The cost-benefit (and risk-reward) to the Indian economy is clearly in favour of RBI’s giant steps towards the set objectives of operating policy rate at 7% and CRR at 3%. It is a win-win proposition for all stake holders, and the UPA coalition ahead of 2014 elections!

The post-policy range is seen for NIFTY at 5600-6100, 10Y Bond at 7.75-7.95 and Rupee at 53-55 and markets are indecisive, trading at the middle of these ranges with attention on RBI. MAREKT PULSE remains bullish on markets taking comfort from RBI’s obligation to walk along with the Government. It happens everywhere, why not in India when risks to inflation from twin-deficits is significantly diluted?

Moses Harding

Weekly report for 11-15 March 2013

MARKET PULSE: Weekly report for 11-15 March 2013

Signs of RBI’s shift of priority from inflation to growth

The Finance Minister has tightened the screws on loose fiscal policy by delivering 5.2% fiscal deficit for FY13, and seen very confident on delivery of FY14 budget estimate of 4.8%. The Government is also doing its best on policy reforms to spur growth and investments, and to attract capital flows to limit impact of Current Account deficit on inflation, liquidity and rupee exchange rate. The Global Rating agencies have acknowledged the measures taken to address their concerns relating to policy reforms and fiscal consolidation. All along, RBI did not have the option to release its grips on hawkish monetary policy stance on the presumption that loose fiscal policy and dovish monetary policy cannot co-exist. Now that fiscal policy is water-tight, it is time for RBI to set the monetary policy tunes in traction with moderation in fiscal policy. It is obvious that FM’s deliverable on growth and revenues is largely dependent on RBI’s support through administration of low interest rates and surplus system liquidity. In anticipation of RBI’s shift into growth-supportive monetary stance, post-budget weakness on markets is reversed quickly and shift into bullish undertone is dependent on RBI’s rate action on 19^th March and dovish guidance on the way forward. RBI should take note of the bearish impact on markets post hawkish guidance on 29^th January monetary policy despite delivering 25 bps cut in policy rates and CRR. It is not a straight-forward decision for RBI. Its concerns on CAD, elevated retail CPI inflation and low real interest rates remain valid but the immediate priority now is to step-up GDP growth momentum in H1/FY14 to above 6% from Q4/FY13 GDP growth estimate at 4.75-5.0% through strong revival of investment and consumption; achievement of these is highly dependent on interest rate and liquidity support of RBI.

The expectation build-up is for shift of LAF corridor to 6.0-7.0% by end June 2013 with room for 75 bps rate cut, along with release of liquidity through gradual reduction in CRR from 4% to 3%. If RBI finds merit in these expectations, it may be good (and prudent) to front load rate action, rather than delivery of 25 bps cut each in its policy meeting on 19^th March, end April and mid June. RBI’s concern however will be on real interest rate to promote savings, but the comfort is from liquidity driven build-up of higher tenor spread for medium/long term deposits. The significant dilution in headwinds from external sector on the Indian economy and markets will add to confidence. It is time for RBI to set its monetary policy as catalyst to achieve FY14 GDP growth at 6.5-6.7% to support the political ambition of the UPA ahead of 2014 general election. The expectation on 19^th March is for minimum 25 bps cut in policy rates and CRR, not ruling out an aggressive stance of 50 bps cut in policy rates.      

Exchange Rate market:

Rupee quickly recovered from post-Budget jitters for strong intra-week rally from 55.15 to 54.26 before close of week at 54.28. MARKET PULSE strategy was to initiate strategic “dollar short” positions and cover exports (across 3-12 months and beyond) at 55.10-55.35 with high confidence that intra-2013 low of 55.38 will stay safe, driven by dilution in headwinds from external sector, high (and attractive premium) and RBI’s obligation to walk the monetary policy in tune with Government’s fiscal prudence. The sharp rally from 55.15 met the intra-week target at 54.13-54.28 (intra-week update on Twitter) where it was suggested to exit 30% of “short dollar book” in anticipation of pre-monetary policy consolidation play at 54.20-54.70. What next? It has been a volatile ride for Rupee in 2013; posted strong recovery from 55.38 to 52.88 but gave up most of gains since 29^th January Monetary policy into post-Budget low at 55.15 and now at 54.28 (around mid-point of intra-2013 low of 55.38 and high of 52.88). Despite CAD worries, USD strength above 55 is seen highly over-valued, hence deserved to be dumped with 3M forward value above 56, 6M dollar above 57 and 12M dollar above 58.50. MARKET PULSE considered Spot dollar above 55 good to shift rupee liabilities to dollars for 3-5/10 years for cost reduction with room for significant price appreciation. Given these dynamics, the market will witness complete pull-out of importers (beyond 15-30 days tenure) at spot above 55 and pull-in accelerated dollar supplies (across 6M-10Y) in the forward segment, and at this point Rupee cuts its traction with Euro weakness. On the other side, spot dollar below 53 will look cheap and attractive to acquire, thus generating good demand from importers and unwind of earlier dollar sales. Given the current economic, fiscal and monetary dynamics, rupee is seen to be firmly struck at 53-55 consolidation and break either-way to attract large one-way flows. That’s what the market witnessed at 55.00-55.15/55.38 and 52.88-53.00 to retain short term consolidation at 53-55. The near term outlook for directional guidance either into 53 or 55 depends on sustainability of high FX premium at 6.50-8.0% (across 12-3M tenure) and RBI’s monetary policy stance on 19^th March, which exerts conflict of interest on the Rupee. At this point of time, there is minimal risk of FII reverse flow and sustainable FII interest is seen in debt and equity capital markets to bridge CAD. For the week, let us watch consolidation at 53.95/54.10-54.55/54.70, test/break either-way not expected to sustain. Given the expectation of 25-50 bps rate cut with neutral (to dovish) guidance on the way forward, near term outlook is for extended rupee gains below 53.80-53.95 into 53.45-53.60. Strategic players can retain “short dollar book” entered at 55.00-55.15, add at 54.55-54.70 for 53.45-53.60. Importers can look to part-hedge April’13 dollars at/below 54.50 (spot at/below 53.90). Stay tuned to intra-week review/trade ideas on Twitter.

EUR/USD traded back-and-forth between set support/buy zone of 1.2950-1.2965 (low at 1.2955) and resistance/sell zone of 1.3135-1.3150 (high at 1.3134) before close of week at 1.3005. In the meanwhile, USD Index was boxed at 81.85-82.00 and 82.85-83.00 (low at 81.90 and high at 82.92) before close of week at 82.71. What next? The USD is looking good post strong US economic data, bullish stock market and signs of easing interest rates in the Euro zone. The risk of extended weakness in the Euro below 1.2950 (into 1.2780) has come into the radar on spike in USD Index beyond 82.92 into 84.10. For the week, let us watch 1.2780/1.2885-1.3085/1.3165 with bias into lower end. The strategy is to trade from “short” for test/break of 1.2950 into 1.2780-1.2880 with the risk of complete unwind of recent rally from 1.2660-1.3711.

USD/JPY met the set 96-97 objective with an intra-week high of 96.54 before close of week at 96.02. This completes the expected rally from 90-91 to 96-97 with recent move from 90.92 to 96.54. What next? The tone is bullish driven by dollar strength and loose monetary regime in Japan, pulling April-August 2009 high’s of 97.78-101.45 into the radar while 95 remains firm. For the week, let us watch 95-100 with bias into higher end. The strategy is to stay “long” at 95-96 (with stop below 94.75) for 99.75-100.

Interest Rate market:

10Y Bond found solid support at 7.90% for sharp intra-week rally into 7.83%, thus trading end-to-end of set intra-week range of 7.80/7.83-7.90/7.93%. The rally was triggered by expectation of 50-75 bps cut by June 2013 to be catalyst for step-up in growth momentum from below 5% to above 6%. What next? There are signs of break-out of set near term consolidation range of 7.78/7.80-7.93/7.95 on shift into FY14 with near term objective at 7.70-7.75% covering 50 bps rate cut. Beyond there, pipe-line FY14 bond supplies and unwinding of excess SLR will arrest gains beyond 7.70-7.75%. MARKET PULSE strategy to unwind “longs” at 7.78-7.80% and re-instate at 7.88-7.93% has worked well and the chase for 15-20 bps rally has already begun. For the week, let us watch 7.78/7.80-7.83/7.85 with bias into lower end. The strategy is to retain “long book” entered at 7.88-7.93%, add at 7.83-7.85% for 7.70-7.73%.

OIS rates boxed in now familiar range of 7.55-7.60% and 7.20-7.25% in back-and-forth trading mode. The strategy to receive 1Y at/above 7.60% and pay 5Y at/below 7.20% has worked well while retaining 40 bps “carry”. What next? There is no strong momentum either-way, thus making the trading game not very attractive without any signs of excessive moves. 1Y OIS rate will stay heavy at 7.58-7.60% while 5Y rate finds solid support at 7.15-7.18%, setting up not more than 5-7 bps reversal. For the week, let us continue to watch 1Y at 7.53/7.55-7.58/7.60 and 5Y at 7.18/7.20-7.23/7.25. The strategy is to trade end-to-end with tight stop on break.

FX Premium boxed at 7.65-7.90% in 3M and 6.40-6.65% in 12M with 3X12 play, bullish momentum in the 3M driven by elevated MM rates and bearish pressure in 12M on strong dollar supplies from exporters. What next? The short term bull-run from 6% (3M) and 4% (12M) is already finished around 8% and 6.75% respectively and sharp reversal is work-in-process on shift into FY14 with targets below 7% and 6% respectively. For the week, let us watch consolidation at 7.50-7.75/7.85 (3M) and 6.25-6.50/6.60 (12M). The strategy is to trade end-to-end but to build strategic “received book” at 7.75-7.85% in 3M and 6.50-6.60% in 12M for immediate objective at 7% and 6% respectively.

Equity market:

NIFTY quickly got out of post-budget weakness below 5750 to post a strong intra-week rally from 5663 into set relief-rally objective at 5950-5965 (high at 5952) before posting a strong weekly close at 5945. The trigger for the rally was from combination of bullish cues from external sector and build-up of RBI’s shift of prioritisation from inflation to growth. What next? MARKET PUSE chased the reversal in NIFTY from 6100 into set short term base of 5750; post-budget extension below 5750 held solid above set intra-2013 support of 5600-5650 to trigger 289 pip intra-week rally. This sharp turnaround of  fourtunes would provide comfort to FIIs (backed by relief rally in rupee from above 55 into 54) while DIIs continue to prefer fixed income assets ahead of 50-75 bps rate cut. The bulls have now pulled intra-2013 high at 6111 into the radar and beyond there would need RBI’s dovish guidance on rates and liquidity. For the week, let us watch 5890/5920-6080/6110 with bias into higher end. Strategic investors who have exited longs at/above 5950 can now look to re-build at current and on dips into 5920-5880 for 6100. Beyond there, any pleasant surprises from RBI will get the focus into 6200-6215 ahead of 6338-6357.

Commodity market:

Gold held at 1585 for gradual weakness into first objective at 1555 (low at 1560.80) but attracted good “shorts squeeze” for weekly close at 1578 with most trades at 1570-1585. What next? Intra-2013 reversal from 1695 should find solid support at 1475-1525 in the near term for possible relief rally into 1595-1620. The short/medium trend is bearish for extended weakness into 1300. For the week, let us continue to watch 1525-1590/1605 with bias into lower end. The strategy is to sell in two lots at 1585-1590 and 1600-1605 with tight stop for 1555-1560 and 1525-1530. It is not prudent to stay “short” at 1475-1525 where we switch sides for the relief rally as counter trade.

NYMEX Crude met its reversal target at 89.50-90.00 (low at 89.33) only to attract “shorts squeeze” for sharp reversal to 92.00 (high at 92.03) before close of week at 91.75. What next? The near term tone is mixed, boxed between build-up of global growth momentum and demand-supply squeeze. For the week, let us watch consolidation at 89/90-94/95 not ruling out extended weakness into 84 in the near term. The strategy is to trade end-to-end while strategic players prefer to stay “short” at 93.50-94.50 (with stop above 95) for 84.50-89.50.

Have a great week ahead............................................Moses Harding