Retain non - euphoric optimism!

Sensible move by S&P:

The upgrade in outlook was over-due! It does not make sense to retain negative outlook when the attention of global investors is on India. The operating environment has changed significantly since Modi taking guard at the Centre. There have been many lofted shots to the boundary in the first few overs! The screams (and chants) from the gallery are loud and the world is taking note of emerging business opportunities in India. The engagement within Asia-Pacific region is encouraging. Modi's visit to the US will emerge as India leading the connect between East and the West for building linkages for mutual benefits. Bottom-line line is to make the western monies to chase opportunities in India! All taken, there is no reason for global rating agencies to be negative on India; S&P was alone and joining with others is not a surprise, although bit too late! The timing of S&P shift to stable outlook is perfect when Indian asset classes were under pressure for break-down! Now, global rating agencies are unanimous on Indian economic prospects with stable (to positive) outlook and stay in preparedness for upgrade if Modi Government deliver to expectations!

Factors leading to upgrade in 2015:

The foundation is firm now; there is political majority, decisive leadership and consensus approach with opposition parties and non-NDA state governments. The concerns from policy paralysis, regulatory irritants and administrative bottlenecks are behind. Modi's mantra is to deliver effective and good governance building skills, speed and scale. All these should lead to (a) India emerging as a great place to do business and (b) ensure good (and steady) long term returns for the investors. Global rating agencies will keenly watch the beneficial impact on macroeconomic fundamentals. The immediate focus will be on the following for FY15:

(a) step-up in GDP growth momentum to over 5.5%

(b) Control of fiscal deficit at sub 4%

(c) Steady CPI inflation at 6-7%

(d) Exchange rate stability with control on the CAD without heavy dependence on hot-money FII flows to fund deficit

No doubt, the "bar" is lifted up but not seen as ambitious given the pent-up momentum. The hope (and optimism) of upgrade in India sovereign rating is firmly on the radar and leading the action into first half of 2015 is the immediate agenda for Modi and his team!

Impact on Indian markets:

I retain the set strategic focus trading zones set for the short term, rest of 2014.

Retain NIFTY focus at 7700/7850-8150/8300. Having already seen back-and-forth moves in quick-time, momentum now will be into higher end, and prepare for shift into higher focus zone at 8000/8100-8400/8500 at start of 2015 and for more, if all goes well with attention on Budget FY16.

Retain Rupee focus at 60.20-61.70; here again, have seen back-and-forth moves in quick time retaining the bullish undertone on the way forward despite firm USD against global currencies. India growth story, sustainable bearish undertone of commodities, robust foreign currency inflows and dollar supply-driven mode in forward market (diluting importer's fear while retaining high-premium advantage to exporters) will dilute the strong dollar impact on Rupee, emerging as one of the stronger currencies of the world. All taken, end Mar'15 $ has strong resistance at 64 and 12M $ at 66.50, good enough for exporters when spot USD/INR is expected to stay steady at 60-63 for the next 6-12 months.

RBI is expected to stay neutral on policy rates (and tight on liquidity) for the next 6-12 months till structural woes on growth-inflation dynamics are resolved. The shift to dovish stance will be dependent on FED momentum on rate-hike cycle and down-trend momentum in CPI into/below 6%. Retain 12M focus on 10Y bond yield at 8.15-8.65% and not sure at this stage on stability at 8.15-8.40% or 8.40-8.65%. But given the optimism on twin-deficits and exchange rate stability, bias will be on stability around 8.40% given the risks from supply-side and pipe-line SLR/HTM reductions.

All taken, there are no reasons to stay negative on Indian asset markets and allow stability till clarity on policy legislation and on-ground execution to convert the pent-up optimism into ground reality, and to step up across-the-pyramid economic and social well-being!

The country is in the able hands of Narendra Modi, Arun Jaitley and Raghuram Rajan; the combined strength of the trio brings the confidence to domestic (and foreign) stake holders; they all know it is a make-or-break opportunity to either elevate India status in the global arena or stay insignificant into next generation!

At this stage, it is prudent to stay positive and be overweight on India!

Moses Harding