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 29th 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
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