Indian financial assets on over-drive! Handle with prudence!

Prudent to cash out ahead of end 2014

Indian equity and bond markets got the desired energy from extended fall in Brent Crude below $75 (into $68-70), thus building excessive hope on rate cut from RBI ahead of expectation. In the process, NIFTY hit 8585-8600 target (post shallow correction into 8400-8450) and 10Y bond met 8.0-8.05% objective (holding firm at 8.15-8.20% support). The trigger for build-up of extreme heat on markets is from the beneficial impact from lower Crude Oil price (Brent down from over $115 to below $70) on India macroeconomic fundamentals, enabling RBI to get more comfort to turn dovish on monetary policy. What to do now having completed end-to-end chase? MARKET PULSE strategy is to end the bull-run chase in NIFTY from 7700-7750 at 8585-8600 and 10Y bond from 8.65% at 8.0-8.05%. Both are done now! What next? Prefer not to chase extended rally in NIFTY beyond 8600 and 10Y bond below 8% and see it prudent to cash out to take money off the table ahead of 2014 year end. Obviously, it is early start of Christmas & New year holidays, which is worth it after the fantastic two-way moves in 2014! Most times, a bird in hand is worth two in the bush!

Rupee may emerge as risk on financial assets:

USD/INR lift of base from 60.90-61.15 to 61.45-61.70 is not surprise (and as per script building alignment with end 2014 USD/INR target at 62.20-62.35); worry now is from extended weakness, pulling end March 2015 target of 62.85-63.35 to end December 2014; complete removal of administrative strictures on Gold imports sends necessary signal to the market that Rupee is over-valued and necessary value-adjustment is required to stay competitive to exports and foreign currency inflows. The system also needs to take note of the existing structural imbalance of excessive over-weight on Rupee from unhedged imports, mostly covered exports and large unhedged carry-trade FC liabilities (short-long term). The structural woes is also from the poor quality of reserves (largely built out of sterilisation of off-shore inflows) and huge $ appetite from RBI. All taken, Rupee is vulnerable to domestic and external shocks; and if interest rate squeeze runs ahead of inflation differential squeeze, Rupee may be at risk of one-way excessive weakness. RBI may not have band-width (or inclination) for strong protection to Rupee this time as precaution to ring-fence FII investments. While directional bias on Rupee is clear for shift into near-term trading range at 61.70/61.95-62.85/63.35 with bearish undertone, need to see FII reaction for the price-momentum; will FII see Rupee weakness as good opportunity to ship more funds enroute to equity and bond assets or drop the hot-to-hold near-term valuation and take fresh guard in 2015? Rupee immediate fortunes rest in the hands of FIIs and RBI may not react to SOS calls from importers and carry-trade FC borrowers. So, need to beware!

What can RBI do on 2nd December?

Markets have already delivered the verdict, pricing in 50 bps rate cut in rest of 2015. The option given to RBI is either to deliver in 2 baby-steps of 25 bps each or one-shot 50 bps now or in Q4/FY15 (Q1/2015). Need to see RBI's reaction to this pressure! First time, RR is seen to be caught on the wrong foot, despite stern warnings not to get carried away! What will be RR's reactive response to market stake-holders euophoria? Definitely, RR may not be seen as being catalyst to current market exuberance and he may also not be seen to dose the fire completely. The balancing act this time is not on interest rates (or liquidity) but to balance the sentiment (and sense) between bulls and the bears (of equity and debt markets). MARKET PULSE set exit dates as 27th November to 1st December; no review of this stance and would take fresh look post-policy for 2015 strategy.

Moses Harding 

RBI dilemma : To cut rates or stay in pause!

The market opinion is divided on RBI's monetary policy action on 2nd December; there is pent-up expectation (and pressure) on RBI both from domestic cues and external environment to cut policy rates, while some see sense in status-quo till confirmation on critical factors, and to avoid abrupt reversal in stance as witnessed in 2013. Obviously, things are much better now in terms of stakeholders sentiment on the Indian economy and improved macroeconomic fundamentals. Let us take an overview on factors that would impact RBI's decision - to deliver to the gallery with rate cut or stay neutral till end of FY15:

Liquidity and cost of funds not seen as hindrance to growth:

The system liquidity is in plenty and cost (and return) of funds is low. The need at this stage is not to boost demand, but is from supply squeeze with not enough investor (and lender) appetite to use (or expand) capacity. RBI continue to see current demand-supply dynamics as inflationary, given the consumption appetite even at current cost of liquidity. The belief is that demand-push easy monetary stance without adequate measures to expand supply will lead to higher inflation, which in turn will affect long term growth prospects! The theory of rate cut to spur growth momentum is not seen to be relevant when domestic liquidity is in plenty and RBI adds to system liquidity absorbing excessive off-shore inflows. RBI also believes in providing decent inflation adjusted returns to retail investors on their savings for the future. All taken, there is no prudence to cut rates now to benefit the wholesale borrowers at the cost of hurting retail investors.

Need some more time to get long term comfort on inflation:

Worst is behind on inflation, thanks to sharp reversal in imported commodity prices and base effect; while luck factor has favoured the system, there are not enough efforts to redress the structural impact on inflation from supply-side and price-stability of essential items that affects the major population. While there is great relief from sharp downtrend in CPI below 6% and WPI below 3%, sustainability at lower levels into long term is still in doubt, if the luck factor turns otherwise when base effect turns against! The concern is also from subsidy pass through impact on essential items if price benefit factors do not stay valid over long term. All taken, an autonomous RBI will not opt to jump the gun to bite the bullet now, given the lack of confidence on price-stability and sustainability of inflation at current comfortable levels.

Concerns on inflation from twin-deficits is not yet resolved:

Worst is seen to be behind on Current Account Deficit (CAD) and fiscal deficit, but desirable long term comfort is still work in progress with serious risks still in play. The relief on CAD is not driven by structural cues of higher exports and lower imports or from accelerated exports. The benefit is from combination of external luck factor (lower commodity prices) and administrative strictures (restricted gold imports). The funding of currency deficit is largely from hot-money, short-term, volatile and fair-weather inflows and not yet from stable, long term FDI flows. It is not prudent to ease rates now which would trigger reverse flow of hot-money FII funds to avoid repeat of run on Rupee seen in 2013. Combination of rate cut against weak Rupee is zero-sum game! It is long way to go to achieve fiscal prudence, given the carry-over impact of previous years. It is believed that fiscal deficit at 4% is heavily dressed up and funded through mix of huge market borrowing and struggle through disinvestment. The issues around cost optimisation, revenue maximisation, borrowing for consumption, insignificant public investment for creation of productive assets etc still remain valid with no sight on early resolution. The combined issues around twin-deficits in the absence of long term sustainable solutions (and remedial actions) do not provide the desired comfort for RBI on long term inflationary expectation. All taken, there is no case for shift to dovish monetary policy stance as yet!

Interest and Exchange rate conflicts remain valid:

The pulse of a strong economy is felt from price-stability of its exchange rate and not from bullish equity market, when the momentum is triggered by chase of external excess liquidity! It is obvious that external liquidity driven rally in Indian equity and bond assets (triggered by FIIs and followed by domestic traders) is not sustainable over long term unless backed by robust macroeconomic fundamentals. While long term growth prospects of India emerge as support to Indian equity market, FIIs stay put on Indian bond markets is dependent on yields (and rates) remaining attractive adjusting to inflation differential with minimal price volatility on USD/INR exchange rate. At this stage, squeeze of India-US bond yield spread will only result in exit of off-shore investment in India bond market to trigger one-way excessive weakness on Rupee unwinding most of the recovery from 68.85 to 58.33. All taken, RBI can not risk run on Rupee which will squeeze Rupee liquidity (through its $ sales) setting up upward bias on short-term interest rates.

Can India stand alone when most Central Banks are in ultra-dovish monetary policy stance?

RBI can not afford to ignore developments around Indian financial markets! The external system is let lose with huge liquidity at low interest rates and weak exchange rate. Their agenda is to boost demand for higher utilisation of existing capacity through domestic consumption and to enhance exports through exchange rate advantage over peers (and competition). It becomes easy when the system is at low inflation, surplus current account and low fiscal deficit with no supply-side bottlenecks. India is different across all fronts, hence may not be prudent to follow their foot-steps, when impact cues are different! All taken, India may need to stay different (and alone) till structural dynamics turn supportive for shift to dovish monetary policy stance with long term comfort on growth-inflation dynamics.

RBI stuck between strong expectations and weak domestic cues:

RBI is not in an enviable position, stuck between the devil (rate cut pressure) and the deep sea (lack of optimism on the way forward)! If the major issue is on liquidity and exchange rate (to stay look-alike to other Central Banks), RBI can stay on the dollar bid for extended period of time (maintaining Rupee exchange rate competitive for Indian exports) with the twin agenda to build $ reserves and infuse rupees in the system. If excess Rupee liquidity is not sterilised through OMO bond sales, overnight operating policy rate will move down from Repo to Reverse Repo rate. Can the system afford 1% drop from 8.0 to 7.0% allowing crash in bond yields? It is obviously No, if it is going to trigger FII exit from Bonds forcing run on the Rupee. So, need to plan out of the box to retain operating policy rate at 8% when Rupee exchange rate value adjustment is being administered through $ purchases. The option has to be in combination of shifting refinance to MSF rate and squeeze of excess SLR held by Banks. When RBI came to the rescue of Banks through special dispensation measures to save mark-to-market impact from rising bond yields, it is pay-back time for Banks.

It is tough call to read Rajan's verdict!

It is toss-up between 25 bps rate cut and pause. What is important is the policy tone and guidance on the way forward. Even if RBI is pushed to deliver rate cut, the anguish will be felt in the tone. Whatever may be the verdict, price stability is guaranteed in the Money/Bond market. There may not be major impact on the Rupee exchange rate as RBI has band-width to provide protection either-way. The worst hit will be the equity market, but would be seen as correction to the stretched valuation. So, as always most stakeholders will find reasons (and logic) to speak supportive of Governor Rajan on whatever stance he may wish to take on 2nd December, and those who don't are few, hence irrelevant!

I will be surprised if Governor Rajan succumb to pressure and deliver rate cut! Whatever is the outcome, see post-policy price-stability in 10Y bond at 8.0/8.05-8.20/8.25%, NIFTY at 8150/8200-8550/8600 and USD/INR at 61.20/61.45-62.20/62.45.

Moses Harding

Currency market : USD retains economic and carry advantage but not against Rupee

USD retains carry-trade advantage against major currencies

US economy retains its economic advantage over developed economies; extended ultra-easy money policy of Euro zone, UK and Japan extend advantage to the USD in a platter for at least next couple of years, if not more! This stance has already driven DXY from 84.50 to 88.35 driving Euro down from 1.2885 to 1.2537, JPY down from 105.18 to 118.96 and GBP down from 1.6524 to 1.5588. There is no relief for major currencies as USD emerge stronger till economic recession worries are out of the way! What next?

DXY is at striking distance of 88.75-89.65 target for completion of the chase from 84.50-84.75. The high so far is at 88.39 with strong weekly close above 88.25 at 88.28. The set consolidation focus at 87.25-88.25 is done with bias now into 88.75 ahead of 89.65 with near-term base lifted up at 87.50-87.75. For now, let us retain focus at 87.50/87.75-88.75; short term bias for shift into higher trading range at 87.25/88.25-91.50/92.50 is pulled into the radar.

EUR/USD correction process set within 1.2350/1.2400-1.2585/1.2635 is done with 1.2357 to 1.2599 to 1.2373 with weak weekly close at 1.2388, thus pulling 1.2050 into near-term focus while 1.2485-1.2500 seen heavy. For now, let us watch 1.2000/1.2050-1.2450/1.2500 with bias into lower end; be with bear-run chase!

USD/JPY complete the chase from 105-105.50 to 118.50-120.00; up from 105.18 to 118.96 at break-neck speed since 15th October. The correction from below 119 is shallow at 117.33 with firm weekly close at 117.80, thus retaining near/short term bullish undertone with next target at 124.16 (high of June 2007 which triggered multi-year reversal into October 2011 low at 75.55). While the multi-year relief from 75.55 to 119 brings cheer to Japanese exporters, economic recession and inability to script revival plans is serious concern for Japanese authorities. For now, let us set focus at 115.50/116.50-119/120 with bias into higher end, preparing steam for extended bull-run into 124.00, to complete the back-and-forth of 124.16 to 75.55 move.

GBP/USD intra-year fall from 1.7191 is steep with low at 1.5588. The confirmation of extended bear-run is from conclusive break below 1.6000. The immediate mild support is seen at 1.5560-1.5585 with firm resistance at 1.5725 (ahead of 1.5825); bias however is for extended weakness into 1.5300-1.5350. For now, let us focus our attention at 1.5300/1.5350-1.5700/1.5750 with bias into lower end.

Rupee cues mixed between strong domestic cues, robust external flows and need to maintain export competitive valuation

Post the excessive volatility since July 2013 (53 to 69 to 58), Rupee is now seen steady at 61/61.50-63/63.50, adjusting to REER. While it is easy for RBI to provide protection at the lower end, it may be tough to protect Rupee at 63-63.50 if FIIs turn net sellers in equity and bond markets for whatever reasons - profit booking or fear of hot-to-hold valuation or bond spread squeeze etc. MARKET PULSE outlook for 2014 is for Rupee consolidation at 58-63; saw Rupee recovery from January low of 63.32 to high of 58.33 in May, and thereafter in back-and-forth mode at 60-62 (61.74 to 60.20 to 62.22). The set near-term (October-December 2014) strategic focus at 60.95-61.95/62.20 is also done ahead of time, with move from 60.92 to 62.22 for SOS call to RBI to cut importer's scare (and pain on unhedged exposure); RBI did help to restore order for push-back to lower end of pre-policy focus range of 61.70-61.95/62.20 with comfortable weekly close at 61.76. In the process, 12M $ traded end-to-end from 65.50 to 66.50-67.00 (considered good for LTFX exports and carry-trade flows) and 6M $ up from 63.25 to 64.25-64.75. What next?

There no fresh cues to suggest review of set October-December focus at 60.95/61.20-61.95/62.20 and into December at 61.45/61.70-62.20 for 2014 close at 62.10-62.35. With USD in extended bullish undertone against major and EM currencies and India valuation seen stretched in the short term (December to February Budget 2015), downside risk is not ruled out for shift of focus at 61.45/61.70-62.85/63.35 for FY15 close around 63. RBI has reasons to build reserves not only to cover 10-12 months of import but also to build strength to ring-fence Rupee fair-value from FII sudden & lumpy exit. Given the mixed cues, it is not prudent to stay over-weight on risk either-way; good to stay risk-off tracking end Dec'14 $ range at 61.85/62.00-62.35/62.50; end Mar'15 $ at 63.00/63.15-63.50/63.65 (break-out either-way is excessive, hence not to sustain for long!). Strategic traders/carry-trade borrowers/investors continue to track 6M $ at 63.25-64.25/64.75 and 12M $ at 65.50-66.50/67.00. While macro fundamentals stay supportive to Rupee over long term, short term pressure is from FII mood-swings and need for exchange rate to stay supportive for exports and inflows till strategic woes around CAD is out of the way! All taken, strategy for exporters is to absorb (and support) extended (and sudden) weakness on Rupee (avoiding greed) while importers avoid taking things for granted taking comfort from RBI rescue! For now (ahead of RBI policy), see Rupee steady at 61.45/61.70-61.95/62.20 with USD/INR long-term base lifted up from 60.70 to 61.20 while preparing for end of FY15 range shift to 61.95/62.20-63.10/63.35.

Moses Harding

Commodities market : cheap-to-acquire support

Appetite shift from hot2hold to cheap2acquire

MARKET PULSE ended the Brent Crude bear-run chase from $115 at $75-77; the downward pressure was triggered from demand-supply dynamics without fear on bullish, safe-haven impact from geo-political concerns. All taken, over 33% fall from 115.71 to 76.76 since mid June 2014 is excessive and stretched. The suggestion for formation of near/short term base at 75-77 is also driven by shift of investor appetite from higher valuation equity asset to lower valuation commodity assets (in high-risk asset category) for better risk-reward play. Accordingly, near-term focus was set at 75/77-83/85. What next? The correction from 76.76 has hit 81.61 with weekly close above $80 at 80.36; near-term outlook is for extended correction into 85 while 77.50-79.50 stays firm, with most trades likely at inner-ring of 77.50/79.50-83.50/85 focus zone. All taken, it is win-win for most stake holders for Brent Crude to stay sideways in consolidation mode at 75/77-83/85; break-out bias, if at all may be for further extension into 86.50-88.00 tracking bullish cues in equity and bond markets.

The strategy for Gold was also to end the near term chase from 1250-1265 at 1120-1135 for correction into 1200-1210 ahead of 1250-1265 for completion of back-and-forth moves within 1135-1265. The move as per script from 1255.20 to 1131.85 to 1207.70 (since 21/10/14) is break-neck! What next? Weekly close at 1200-1210 (at 1201.09) is positive retaining bullish momentum for 1250-1265, higher end of set near-term strategic focus at 1120/1135-1250/1265. The focus is now at 1185-1235/1260 with bias into higher end. At this stage, prefer to stay with consolidation outlook at 1135-1260 retaining short/medium term outlook below 1120-1135 while below 1280.

Moses Harding

Equity & Bond markets : Investor's delight!

Global Liquidity driven rally is in extended mode:

Developed economies continue to stay under pressure with downside risks from growth depression, increased un(and under)employment, and resultant deterioration in macroeconomic fundamentals. Given the priority on growth, consumer spend and employment generation with the need to squeeze the widening gap in supply-demand capacity, Central Banks have let loose their monetary policy with excess liquidity at low interest rates. Inflation is not seen as deterant to stay in ultra-dovish, growth supportive monetary stance for long till sight of growth sparks in the system. While ECB and others (include Asia heavyweights Japan and China) have reaffirmed extended liquidity support; there are clear signals of FED delaying rate-hike shift into 2016. All taken, monies can't be kept idle in Banks (to avoid payment of parking fee) and Central Banks are more willing to provide refinance (and high leverage) at low (near zero) interest cost! So, monies have to chase credit and investments or spent in consumption. In the absence of credit demand, there is no second option other than chasing high-risk equity assets and low-risk Gilts!

The liquidity driven rally in DJIA index since 15th October (low of 15855) is in extended mode beyond 17350 with strong weekly close at 17810 post print of all-time high at 17894. The first signal for set up of bullish undertone was sighted post complete unwind of FED rate-scare collapse from 17350 to 15850 in less than a month since 19th September. MARKET PULSE set intra-week consolidation at 17600-18100 with overshoot either-way not expected to sustain. What next? The bounce from 17603 into 17894 has strong momentum and it is no surprise to see investors pulling out their take-profit offers despite hot-to-hold valuation in the absence of alternate investment avenues. The near term outlook is obviously positive for more gains, but can not ignore risk from unwind of investments (to cut leverage) ahead of 2014 year end for taking money off the table before Christmas holidays. The target ahead is 18100/18275/18500 with firm support at 17600/17500. The strategy is to be with the bullish momentum with trail-stop below 17600.

US 10Y bond finds solid support at 2.35-2.40% on good demand from risk-neutral and risk-off investors. For those who wish to protect capital with assured inflation adjusted return, time-decay (and carry) is in favour when FED is expected to stay in extended pause on rates, when it is aware that rate-hike impact may not yield desired outcome when others around them are pumping liquidity at near zero interest rate. This outlook drove the 10Y US bond yield from 2.65% to 1.90% and now steady at 2.25-2.35%. The near term outlook is for bullish consolidation at 2.10-2.35/2.40% The strategy is to stay invested at 2.35-2.40% but risk-reward may not be in favour on extended gain into 1.90-2.10%. It is not bad to spread the risk between equity and Gilts into year end.

Sovereign rating upgrade and rate cut in 2015 add cheer to India Equity & Bond markets:

All cues in favour; NaMo wave is gaining Tsunami strength for global optimism on India with monies chasing India assets in size and time! No worries on India macroeconomic fundamentals; it could only improve in 2015 to set up long term pace. The execution (and implementation) risk of NaMo India ambition stands diluted. All taken, it is matter of time for India sovereign upgrade and RBI shift into growth supportive monetary stance.

MARKET PULSE set long-term base at 7700-7750 with upward revision at 8150-8200 with near-term target at 8485-8500 ahead of 8585-8600, where long-unwind could emerge ahead of year end 2014. It was all as per script for correction from 8150-8200 to end at 7700-7750 to build steam for 8500. We have seen 8160 to 7723 to 8489 in mirror reflection of DJIA index, but at higher pace! What next? The set pre-policy target at 8585-8600 is at striking distance; strategy was to end the chase from 7700-7750 at 8550-8600. Should we review or be in the chase for more beyond 8600? Not sure at this stage and it is prudent to feel the pulse of price-actions (and momentum) for directional bias from/below 8600. Given the combined strength of domestic euophoria, external support, sovereign rating upgrade and rate-cut ahead, correction from/below 8600 will be shallow, not beyond 8300-8400 and firm pulse at 8600 can extend focus into 8800. In worst case scenario, NIFTY is not seen to go below 8150-8200, seen as long term base into 2019-2024. For now, let us retain focus at 8350/8400-8550/8600 with bias into higher end; there after, prefer to stay neutral on correction into 8350-8400 or extended rally into 8800. The bulls party-time is at break-neck speed with no signs of fatigue!

India 10Y Bond 8.40% 2024 is rock-solid at 8.15% despite completion of end-to-end rally from 8.65 to 8.15%; profit-booking (along with RBI bond sales and vocal caution on rate-cut hope) driven correction had an abrupt end at 8.23-8.25% for back at 8.15%. Stake-holders pressure on RBI is huge while most economies are in dovish monetary policy stance. But, they do not have issues from elevated inflation, high twin-deficits, supply-side bottlenecks and abnormal exchange rate pressure from high dependent hot-money inflows to fund currency deficit. RBI has valid reasons to stay in extended pause, but rate cut is inevitable as worst of worries are behind, and things could only improve from now on. The doubt is on the timing - now or Q4/FY15 or Q1/FY16?!

The short term outlook on India 10Y bond is positive, with good investment appetite at 8.18-8.20% and 8.23-8.25% for chase into 8% for consolidation at 8.0-8.20/8.25%. This range is in alignment with US 10Y bond stability at 2.15-2.35/2.40%; India-US  bond spread around 5.85% (higher end of medium term outlook at 5.50/5.65-5.85/6.0% taking into account squeeze in inflation differential and FED preparedness for rate-hike in 2016) is not seen as major risk on Rupee (which drove the Rupee down from 53 to 68.85 in July 2013). All taken, near-term strategy (pre & post-policy) is to reinstate investment book at 8.16-8.18% and 8.23-8.25% for chase into 8%. Having completed the major chase from 8.65 to 8.15%, next round of 15-20 bps chase is icing on the cake!

Moses Harding

Infrastructure Today Magazine Cover Story - November 2014

Key to success in India is investor confidence!

Link:- http://infrastructuretoday.co.in/News.aspx?nId=5XP7J1UWnPZdBpeGyyu4VA==&NewsType=Key-to-success-in-India-is-investor-confidence

Why huge excess SLR? Statutory cost more safe than credit cost?!

Banks see CRR and SLR as statutory cost to be in business of financial intermediation, while RBI impound good percentage of Bank's NDTL for systemic risk protection. There is also different opinions on the need to impound 26% of deposits in the form of 4% CRR (in cash at 0%) and 22% SLR (in State and Central government bonds at relatively low yield) when Banks pass-through this cost to borrowers. The cost to borrowers is priced at deposit cost + statutory cost + operating cost + RoA margin, with top up cost for liquidity, credit and tenor premium. If SLR is seen as cost, why Banks derive comfort from maintaining huge excess SLR portfolio of 6-8% over the mandatory limit? The amount parked idle with RBI (and out of the system) is huge at more than Rs. 4 Trillion. Banks take the easy way to reduce the pain from holding excess SLR baggage by cutting the cost on incremental deposit acquisition to below 8.25%, at par with Gilt yield across tenors! So, the burden of low credit off-take and risk-aversion is borne by retail depositors, who look upto RBI for relief. This is one of the reason for RBI reluctance to cut policy rates in hurry with preference to be in wait till credit demand (at acceptable quality) picks up from supply-side capacity expansion.

Are there other ways to discourage holding of excess SLR beyond tolerance limit over the mandatory requirement? RBI does not encourage excess CRR viewing it as inefficient cash management by Banks; if that be the case, pile-up of excess SLR is inefficient fund management, taking deposits more than required for financial intermediation!

What can be done? Can CRR & SLR be made fungible with cap on aggregate holding and penalty on excess held? Impact of this will be immediate release of CRR cash into the system and/or sale of SLR securities. This can lead to increased lending appetite at diluted credit risk premium, thereby lower lending rate! It will also result in normalisation of the yield/rate curve across tenors, building long term liquidity (and time-value) premium. Going forward, if the Government sticks to fiscal prudence, market dependence to fund deficit may be in alignment with incremental SLR requirement for deposit growth. Alternatively, excess SLR can be pushed to Government guaranteed fund for supporting scaling up of economic and social infrastructure.

Just thinking aloud on ways and means to divert the huge idle funds for supporting creation of productive economic assets. As of now, liquidity is in plenty at affordable rates, but no lending appetite for those who need!

Food for thought to Modi & Rajan!

Moses Harding

Interview with CNBC TV18 - 17th November 2014

Find out how safe are NCDs as an investment option...

Link:- http://www.moneycontrol.com/video/investing/find-out-how-safencds-asinvestment-option_1230590.html

Markets this week : Special update

Global cues : Mixed dynamics and lack of trend clarity and directional bias!

Global markets continue to derive support (and investor appetite) from system liquidity over-hang, low fixed income yield and few investment options. The liquidity (and low interest rate) driven rally is seen to be stretched with risk-reward not seen to be in favour for fresh investments at current elevated valuation. Ideally, if liquidity driven support is followed by push from improvement (and positive outlook) in macroeconomic fundamentals, then there may not be worry on the way forward. But, most major economies across developed and emerging markets are in depressed mode. There are no clear growth signals from UK/Euro zone, Japan, China to name a few, while US and India look relatively better! All taken, investor appetite is not beyond near term when the visibility ahead is poor; hence markets stay jittery and volatile driven by mood-swings from risk-on to risk-off with most preferring to stay risk neutral (and light) and be in readiness (and fleet-footed) to jump one way or other. At this stage, it is kind of 2 steps up and 1 step down, and time is not seen to be far away for shift into 1 step up and 2 steps down. The near term ahead (into Christmas and New year season) will be volatile as investors unwind to stay light and risk-off into 2014 year end; one-way impact will be significant in illiquid market conditions. It is prudent to be cautious and good to take money off the table (winding up the 2014 bull-ride before set up of reversal mode), and take fresh look for 2015.

Domestic Cues : Bullish into long term and caution on the short term!

Global investors see India as great place to be in despite not considered as great place for doing business! The comfort of change into pro-business destination by the Modi regime is good, hence not seen as major risk factor. There has been significant turnaround in macroeconomic fundamentals, thanks to combination of efforts, luck and capabilities. There are lot of policy initiatives in pipe-line to get the growth revival with aspirations for GDP growth over 7.5%, CPI inflation stability at 4-6% and improved twin deficits at sub 2% by 2017-2019. The combined focus on building economic & social infrastructure and Make-in-India programme will make tremendous long term beneficial impact on the Indian economy, with growth momentum ahead of China. There is high possibility of sovereign rating upgrade and emergence of favourable monetary conditions in 2015. The pent-up domestic euophoria (and optimism) emerge as solid ring-fence to external headwinds and stay as catalyst to external tailwinds. While medium to long term bullish cues stay valid, do not rule out near/short term correction for value-adjustment profit booking, seen as consolidation phase while being in bull trend. The built-up confidence on Modi has only grown since May 2014; desire & urge to make a difference and the support that Modi has gained from within India and the G20 stand comfort to India's emergence as a major economic force by 2019-2024. This decade is for India; sleeping elephant is awake now and ready to move!

Equity market: Consolidation phase!

DJIA index not only recouped the reversal from 17350 to 15855, but also extended the lead into 17700 in cautious undertone with marginal shift in weekly close from 17573 to 17634. What next? The consolidation phase is there to stay into the near term with base at 17350-17500 for 18100-18150; it is good to be with this bullish chase from 15850 with trail stop below 17500.

NIFTY traded to the script with failure at 8415 for shallow correction at 8305-8320 followed by recovery for weekly close at 8389; despite fear of profit-booking unwind, upward shift of weekly close from 8337 is great comfort to the bulls. What next? The long term base is seen up from 7700-7750 to 8150-8200 with near term bullish momentum beyond 8415 into 8500 not ruling out unsustainable extension into 8575-8600 with value-buy support at 8290-8315. The hot2hold heat felt at 8385-8415 is now seen to be shifted to warm, post the shallow correction to build retention appetite for 8575-8600; good to be with the chase with trail stop below 8320-8345. There are no major cues to cause deeper correction despite high valuation post 52 week rally of over 40% at 19 times P/E. See intra-week play not beyond 8250/8300-8550/8600 with bullish undertone.

10Y Bond market : India-US spread seen steady at 5.85-6.0%

India 10Y bond lost steam at 8.15% for push-back into 8.20-8.25% while US 10Y yield stayed in sideways mode at 2.30-2.40%, thus pushing the bond spread from 5.80 to 5.90%. What next? Continue to see stability in US 10Y at 2.25-2.40% (post the volatile swing from 2.65 to 1.90 to 2.40%). While short/medium term bias is for shift into 2.40-2.90/3.15% range, lack of clarity in the near term may not have the desired momentum for sustainable break-out of 2.25-2.40%. The expectation on India 10Y is different with bearish outlook in the near term for stability at 8.15/8.20-8.35/8.40%. RBI is expected to get better clarity on inflation in Q4/FY15 and projection on macroeconomic fundamentals in Budget 2015, and more importantly FED stance on rate hike. There are no cues to suggest extended rally below 8.15% while value-buy strategic bids would emerge at 8.35-8.40%. Our strategy to end the bull-chase from 8.65-8.35% at 8.15-8.20% has worked well and now stay prepared to reinstate book at 8.35-8.40%. During the week, would not be surprised to see shift of trading range from 8.20-8.25% to 8.25-8.30% and prepare for post-policy stability at 8.25-8.40%.

Currency market : $ bullish momentum intact despite sharp lift of base!

As per script, DXY traded back-and-forth of set focus zone at 87.25-88.25 with 88.19 to 87.22 to 88.26 before steady weekly close at 87.54 (against previous 87.57). Despite sharp rally from 84.50 since 15th October, $ bullish undertone is intact for 88.70/89.60 with near-term base at 86.85-87.35.

EUR/USD as per script moved into sideways consolidation mode at 1.2365/1.2415-1.2485/1.2535 post previously week low at 1.2357; weekly close at 1.2521 against previous 1.2452 is relief but bearish undertone intact while the previous sell zone of 1.2565-1.2615 stays firm. For the week, retain focus at 1.2365/1.2415-1.2565/1.2615 retaining near-term target at 1.2050-1.2250.

USD/JPY on fire with the expected rally from 105.00 hit high of 116.82 not far away from target at 118-120; speed of this move since 15th October is break-neck! This is dream-come-true for Japanese exporters and it would be prudent to allow near-term consolidation at 113.50/115-118.50/120 before next round of rally in 2015 into/beyond 124.16 (June 2007 high before trigger of JPY one-way multi-year strength). Play end-to-end of 115-120; break-out either-way not to sustain.

Rupee : value-adjustment to time-decay!

USD/INR lift of base from 60.20 to 61.20 has held well for near-term consolidation at 61.20-61.70/61.95 with weekly close adjusting for time-decay from 61.62 to 61.72. What next? Most cues stay in favour of Rupee; dollar rally against global currencies left no impact on the Rupee; but for RBI hunger for the greenback, Rupee would be at different level sub 60 which is not seen good to provide price-stability! Makes sense and prudent. There is no reason to review the set near-term focus at 61.45-61.95/62.20. Also retain end Dec'14 $ focus at 61.95-62.20/62.35 and Mar'15 $ at 63.10-63.35/63.50; break-out either-way not expected to sustain. It is prudent to stay risk-off on move to either end, while trading end-to-end. For the week, prefer back-and-forth trading at 61.45-61.95 with good flows at either end to prevent break-out with most trades restricted at 61.55-61.70 (end Dec'14 $ at 62.10-62.35).

Commodities : In recovery mode before back into bearish trend!

Has Brent Crude complete its weakness from $115 at 75-77 or more to go? The lower end of the focus zone was moved from 85-87 to 80-82 to 75-77 and saw low at 76.76 before short-squeeze triggered recovery into 79.75 for weekly close at 79.41. What next? The reversal from mid June high at 115.71 to 76.76 (34% in less than 5 months) is sharp for whatever reasons from demand-supply dynamics or growth compression or political play to cut the price advantage to producers who had glorious period since December 2008 rally from 36.20! Brent retain target at 68-70 before stability; uncertain is the reversal point either from 80 or 83 or 85 or 88, thus retaining medium term focus range at 68/70-88/90, seen as good for all! Prefer intra-week consolidation at 76/77-82/83.

In the last weekly update, near-term focus on Gold was set at 1110/1135-1235/1260. The strategy post unwind of strategic short-book at 1135 was to reinstate in 2 lots at 1185-1200 and 1245-1260. Gold recovery from 1131.85 extended to 1193.34 (with most intra-week trades at 1145-1165) before close of week at 1187.85. What now? The focus zone is now up from 1135-1185 to 1160-1210 mid-point of big picture range of 1110-1260. For the week, let us watch sideways consolidation play at 1145/1160-1210/1225.

Moses Harding

Is down-trend in inflation good enough to cut policy rates?

Comfort but no confidence as yet:

The ease (and down-trend) in core and headline inflation is great comfort with confirmation that the worst is behind, thus removing the fear (and risk) of rate hike which RBI has not ruled out in its earlier guidance. What needed now is the confidence on sustainability of inflation at ideal comfort (and tolerance) zone of 2-4% in WPI and 4-6% in CPI, seen as good balance for interest and exchange rate dynamics!

The current ease in retail CPI inflation below 6% and wholesale WPI inflation sub 2% is seen to be driven by base effect and sharp reversal in imported commodity prices. The permanent remedy from removal of supply-side bottlenecks and addressing structural woes around twin deficits is not yet seen. Combining these two factors, there may be upward pressure on headline inflation into medium/long term from lower base, limited downside pressure on commodities, accelerated demand from growth pick-up not being met with desired supply capacity expansion and no clear strategy on fiscal prudence other than disinvestment. There is also need for RBI to retain interest rate high to ring-fence Rupee exchange rate from external sharks. All taken, it does make sense for RBI to stay firm on interest rates and tight on liquidity for now.

Over all, while there is relief on inflation that worst is behind and comfort that the expectation is positive, there is no confidence as yet on long term sustainability when tailwind benefits stay diluted and headwind impact emerge as risk, going forward! It is good to leave Dr.Rajan alone (along with his able economic/technical advisory team) to have a balanced approach with target at long term stability!

Moses Harding

Bullish consolidation in the making into RBI policy!?

MARKET PULSE strategy is to buy run into RBI policy for pre-policy exit (27 November - 1st December), based on pent-up expectation of rate-cut which RBI is not seen to oblige or play to the gallery. Accordingly, the expectation is for pre-policy build up of bullish momentum in NIFTY into 8500 and 10Y bond into 8.15% followed by post-policy value-adjustment into 8200 and 8.35% respectively. Post this update, RBI DG stepped in to dose the heat on the pent-up euophoria by stating that RBI shift into rate cut mode is not at close given the lack of confidence on the inflationary irritants that are in play. The clarity on the same is seen to be known post Budget 2015 (on domestic factors) and post FED guidance on rate-hike momentum (extent of dilution in external tailwinds), if we read in between the lines of DG's caution (or warning) to stakeholders!

Despite the DG bolt from the blue, India financial markets continue to stay in "buy into RBI policy" mode taking comfort from positive global cues of sustainable  bearish momentum on imported commodities, firm global equity markets and steady US Treasury yield, and increased confidence on conversion of domestic euophoria into tangible beneficial impact on India macroeconomic fundamentals leading to sovereign rating upgrade ahead of expectation!

RBI policy on 2nd December is still 3 weeks away; if the buy-into-policy appetite stay intact, there is high possibility of upside extension of the set weekly focus of NIFTY at 8250/8285-8365/8400 into 8465-8515 on run into 2nd Dec'14 (within rest of 2014 big-picture at 8150/8200-8500/8550); weekly close above 8320-8345 is the signal for shift of NT resistance/sell zone from 8365-8415 to 8500-8550. The focus on 10Y bond is retained at 8.15/8.20-8.35/8.40%; break-out bias if any is for extended post-policy correction into 8.40-8.65% on combined impact from hawkish RBI and US 10Y yield spike into 2.40-2.65%; stability of India-US 10Y bond spread at 5.85-6.10% is seen ideal for Rupee stability at 60.20/60.45-60.95/61.20 into end of 2014.

All taken, it is risk-neutral from now to 27th November, while risk-reward turn against investors from there to 2nd December; see baby-steps bullish extension into policy and decent correction thereafter into end 2014. Good to be with the momentum as pulse of price-actions is not weak!

Moses Harding

Currency outlook : Special update

Rock-solid Rupee stability:

USD/INR price-stability is maintained at 60.70/60.95-61.70/61.95 since August 2014, post intra-2014 Rupee recovery from 63.32 to 58.33. During this period end Mar'15 $ trading range is seen in back-and-forth mode at 63-64/64.50 and 12M $ at 65.50-66.50/67.00. All stake-holders have benefited from this consolidation phase; exporter's $ sales at spot 61.70-61.95 paid dividend with time-decay & price-recovery, importer's $ hedge at 60.70-60.95 did cut the pain of being unhedged with decent price-benefits net of time-value and RBI built reserves against rising value of the USD against global currencies. The beauty is also that there is not significant pain or gain being unhedged on imports or exports or FC assets/liabilities. What next?

Rupee gets support from significant improvement (and optimism on the way forward) in India macroeconomic fundamentals; risk from trade/current account deficit and Balance of Payment is behind; high dependency on hot-money fair-weather FII lumpy flows is diluted with accelerated FDI/Long term inflows and RBI pocket is getting deep to defend Rupee against sudden & lumpy $ outflows. The only risk against Rupee is the need to administer value around REER to stay attractive for exports (and inflows) till structural woes of elevated CAD and inflation is out of worry. Till then, any abnormal squeeze in India-US rate differential is bad for Rupee. All taken, RBI stance will be in $ buy mode and retain pause mode on policy rates to retain Rupee stability at 60/61-63 into end of FY15 and beyond. The ST focus is retained at 60.70/60.95-61.95/62.20; end Dec'14 spot target not beyond 61.85-62.35 and end Mar'15 $ spot below 62.85-63.35. The strategy for all stake-holders (including RBI) is to play end-to-end as overshoot either-way not expected to sustain.

USD value stretched but retain bullish undertone:

USD gets bullish advantage from relatively better economic fundamentals (over the developed economies) and the Interest rate advantage from contra monetary position on the way forward. All cues taken, DXY rally from 81-83 (since August-September) to striking distance of target June 2010 high of 88.70 is to the script but the speed is excessive. In the process, Euro is pushed down from 1.40 to 1.2350 and JPY fell sharply 101 to 115.50 in quick time. What is the way forward?

USD retains its upper hand over the Euro and JPY over long period till 2016 from relatively strong economic performance and FED shift into rate-hike cycle from mid 2015 while ECB/BOJ stay in ultra-dovish monetary policy stance till 2016. The only risk on the USD for now is from possible unwind of long book to encash more than expected appreciation before end of 2014. Let us set focus on DXY at 86.25/86.75-88.25/88.75; EUR/USD at 1.2300/1.2350-1.2550/1.2600 and USD/JPY at 112.50-115.50; while ST bias is for extended dollar strength, need to be cautious on whip-saw near-term moves ahead of Christmas holiday season!

Moses Harding

Equity outlook : Special update

Is NIFTY overvalued & hot-to-hold?

The expectation of MARKET PULSE was formation of long term base at 7700-7750 and short term cap at 8150-8200 for back-and-forth play. The bullish cues are from QE driven external liquidity, positive outlook on US growth momentum extending support to global stocks, positive trending in domestic macroeconomic fundamentals and firm NaMo grip for establishment of India economic & social well-being into long term. The bullish momentum beyond 8180 (post one set of back-and-forth moves at 7750-8150) got the trigger from extended QE from Japan, commitment for enhanced liquidity support from ECB and rate-cut expectation from RBI. All these combined, helped NIFTY post a new high over 8180 at 8365 before sideways mode at 8285-8365. In the meanwhile, DJI posted upside break-out after back-and-forth moves at set NT focus of 15850-17350 and into sideways mode at 17350-17700. What next?

Is NIFTY overcooked? It is possible that upside gains in NIFTY for rest of 2014 is limited. While there are no positive triggers ahead, risks to bullish assumptions (and outlook) have emerged. All positive cues (domestic & external) and optimism on the way forward is more than adequately covered in value re-rating since mid 2014. The risk factors now are from unwinding of excessive value built on rate-cut hope on 2nd December, delay in rate-cut into FY16, earnings risk of corporate India to adjust for excessive market valuation and risk of dilution in foreign investor appetite for India Equity at high valuation against short term downside pressure. All taken, India Equity assets has already shifted from cheap2acquire (NIFTY below 7540-7723) to hot2hold (NIFTY over 8365).

What is the way forward? Two options on the way forward for NIFTY: (a) shift of focus for back-and-forth stability at 7700/7750-8150/8200 or (b) retain short term bullish undertone for consolidation (with elevation) at 8150/8200-8500/8550. In either case, long term base is seen firm at 7750-8150 while need new positive triggers to extend bullish momentum beyond 8350-8550. During this time DJI index is expected to do better for extension beyond 17700 for short term consolidation at 17100/17350-18100/18350 as investors shift money into equity (and commodities) awaiting spike in US bond yields. The near term risk on NIFTY is from loss of FII appetite while domestic investors too in unwind mode to book profit at current high valuation for correction into cheap-to-acquire valuation now seen at 7750-8150. For now, let us set focus at 8265/8315-8365/8415 with bias for correction into 8150-8200 and low probability for extended gains into 8500-8550 (seen as ST reversal point into 7750-8150).

It has been terrific 2014 for equity investors and now as we move into year end thin (and illiquid) market, it is prudent to play safe, stay light and book most profit off the table. The risk-reward is not seen to be in favour for staying long NIFTY at 8365-8415 into 2nd December RBI monetary policy and 8500-8550 into year end & holiday season.

Moses Harding

India-US 10Y bond market : Special update

The movement so far is perfect to the script with India 10Y bond losing steam at 8.15-8.20% while US 10Y supported at 2.35-2.40%. It was also seen that India-US 10Y bond spread into 5.70-5.85% is tough to hold with ideal range seen at 5.85-6.35%. Suggestion was made to FIIs to shift appetite from India to US through exit of India 10Y at 8.15-8.20% and buy US 10Y at 2.35-2.40% (for unwind of 6.35% entry through chase of India 10Y from 8.35-8.40% to 8.20% and US 10Y from 1.90-2.0% to 2.35%).

What next? There is now clarity on RBI monetary stance on 2nd December, retaining pause on policy rates (and CRR/SLR) with cautious tone on inflation and attention on external factors from FED monetary stance and price stability on imported commodity assets. There is no issue whatsoever on domestic liquidity (and interest rates) when Banks divert depositor monies into Repo counter and hold huge quantum in unproductive excess SLR, while investors seen content with low Gilt/AAA bond yields. What is missing is the opportunity to invest; solution to credit risk appetite (at reasonable return on investment) can't be achieved through cut in policy rates! It is possible that RBI does not intend to do repeat of 2013, when policy rates were cut in the 1st half only to be reversed (and more) in the 2nd half. RBI stance is seen to be in wait-and-watch till clarity on FED timing of shift into rate-hike mode and resultant price impact on commodity assets and Rupee exchange rate. It is also seen prudent for RBI to wait till March 2015 economic data print to get confirmation of favourable trending in inflation, growth and twin-deficits. On the other hand, signs of growth pick-up in the US economy and downward trend in unemployment number would retain pressure on US 10Y bond yield, going forward.

All taken, broad trading range for rest of 2014 for India 10Y bond is set at 8.20-8.45% and US 10Y at 2.20-2.45% with India-US 10Y bond spread stability at 5.85-6.10% (seen supportive to FII India appetite and to extend stability in USD/INR exchange rate at 60.95/61.20-61.70/61.95). The strategy is to play end-to-end of set ranges as break-out either-way is tough to sustain!

Moses Harding

Commodities : Special update

Precious Metals:

Is the valuation game shift in favour of Gold and Silver? Is the demand-supply equilibrium dilutes excessive bearish momentum? These two questions have emerged to set the tone for near-term directional bias. Precious metals did not get the benefit of QE and ZIRP since 2008-2009, while monies chased equity and bonds assets. The combination of investor monies (and leveraged liquidity) chasing equity & fixed income assets (along with USD rally), the investor appetite for precious metals got cut, hence the set-up of bearish undertone. In the process, precious metals also lost the safe-haven advantage despite serious concerns on growth and irritants in geo-political environment. Not taking into account the fall since 2009-2011, the fall since July 2014 itself is excessive; Gold is down from 1345/1255 to 1132 and Silver down from 21.55/17.65 to 15.03. MARKET PULSE strategy was to end the bearish chase of Gold at 1110-1135, allowing near-term consolidation awaiting fresh cues for clarity. What next? It is possible that Gold would get into sideways consolidation mode at 1110/1135-1235/1260 for rest of 2014; focus is back at earlier support zone of 1165-1215, now turned resistance. The strategy (post close of strategic "short" book at 1135) is to reinstate "short" in 2 lots at 1185-1200 and 1245-1260. While NT trend is mixed, short term bearish undertone below 1110-1135 is seen to be intact. Silver has firm NT support at/above 15.00 for consolidation at 15.00-17.65 and stay neutral on break-out direction.

Brent Crude:

MARKET PULSE strategy was to end the bearish chase from $115 at $80-82 with bias thereafter for NT consolidation at 80/82-88/90 till fresh cues emerge to set up firm break-out bias. The value of Brent Crude is seen to be adjusted to fair value taking demand-supply dynamics (demand compression from growth squeeze) and the premium over the cost of production, when Crude importers have shifted to alternate energies. All taken, it is win-win for all stake-holders for NT consolidation at 80/82-88/90 till clarity on FED shift to hawkish monetary policy stance and pick-up in global economic growth. The strategy is to play end-to-end of 81.63-87.94 as break-out either-way is tough to sustain for now.

Over all, given the excessive heat on the global equity market and upward pressure on US Bond yields, investors will find equity and bond assets hot-to-hold (leading to cut in leveraged investments) and shift appetite in favour of cheap-to-acquire commodity assets.

Moses Harding

Is rate-cut optimism diluted?

The pent-up pressure on RBI Governor to cut policy rates on 2nd December 2014 gets diluted. The external liquidity over-hang (combined with rate cut hope) has already driven NIFTY from 7723 to 8365 and 10Y bond yield from 8.40% to touch below 8.20%. In the process asset valuation is seen to have shifted from cheap2acquire to hot2hold!

What next? While this dilution (and shift of rate cut expectation to Q4/FY15) will lead to gradual correction in NIFTY into lower end of pre & post policy focus zone of 8150/8200-8400/8500 and 10Y bond yield from 8.15-8.20% to 8.35-8.40%, it is temporary relief for spot Rupee for consolidation at 61.20-61.70 despite pent-up bullish momentum on the USD, and to retain end Dec'14 stability at 61.95-62.20 and end Mar'15 at 62.85-63.35.

Whatever may be the RBI action on 2nd December 2014, post-policy stability is seen at 8150/8200-8400; 8.15/8.20-8.35% and 61.20-61.70/61.95; break-out either-way will be tough2sustain! All taken, QE and liquidity (from Japan and Euro zone) driven rally will get diluted on FED shift from neutral to hawkish monetary policy tone (and guidance) into 2015.

Moses Harding

What to expect from RBI on 2nd December: If I were the Governor!

RBI Governor Raghuram Rajan is not in an enviable position ahead of 2nd December 2014 monetary policy. While he would like to stay in extended pause mode on policy rates till clarity from the FED (on shift & momentum on rate-hike cycle) and sustainability of bullish cues from external sector, there is tremendous pressure from stakeholders to cut rates now taking cues from downtrend in core, wholesale and retail inflation and the need to be seen in growth supportive mode following the footsteps of most Central Banks. The financial system has cut the deposit rates in the absence of adequate credit demand and chose not to cut lending rates with limited comfort on credit risk. The bottom-line is that while borrowers do not stand to benefit, yield on savings & investments has taken the hit.

RR has to act now on policy rates without significant impact on money market rate/yield curve to balance the stance of RBI against rest of stakeholders. There is a three point agenda now: (a) to protect the interest of retail investor community; (b) retain interest cost benefit for the systemic important borrowers in core sectors and (c) dilution of impact on Rupee exchange rate from excessive squeeze in interest rate differential to cut lumpy FII exit from Bond & equity markets.

What is the best option?

It is good to make one-time adjustment to policy rates corridor at 6.5-7.5/8.5% with 50 bps cut in Reverse Repo, Repo and MSF rates. Liquidity in the system is already in plenty to drive overnight interbank rate to around/below 7.5%, which may not be to the liking of RBI with the need to retain price stability at higher end of Repo-MSF corridor at 8.0-8.5%. This could be achieved through removal of overnight refinance from Repo counter while keeping the Repo tap open for part at 7-30 days term Repo counter and balance at MSF. The guidance on the way forward can be an extended pause till clarity from external cues (and developments) and domestic executive actions to remove supply side bottlenecks and trigger pick-up in credit demand. This will be seen win-win for all stake-holders: better inflation adjusted return for savings/investments, protect current cost advantage for borrowers and cut interest rate play on Rupee exchange rate. This action will lead to price stability in short term CP/CD money market rate at 8.5-9% across 3-12 month tenors, 10Y Gilt yield at 8.15-8.40% and USD/INR at 61-62.

If I were the Governor, I will deliver to market expectation with one-time 50 bps rate cut along with liquidity management measures to retain operating effective policy rate at 8.0-8.5% and neutral guidance on the way forward with attention on domestic and global cues that would lead to sustainability of CPI around 6% with confirmation for favourable trending into lower end of 4-8% tolerance (and comfort) zone. The need is also to moderate foreign currency inflows as RBI in $ buy mode will lead to excessive system liquidity woes with limited options for sterilisation. Is RR listening?

Moses Harding

2009-2014 Financial Markets Euphoria: Liquidity/Interest Rate comfort against Growth pressure

Global economies got into significant growth pressure since 2008-2009 and it was no surprise to see Central Banks shift into ultra-dovish monetary policy stance with liquidity support through innovative Quantitative Easing (QE) asset repurchases products along with sharp decline in refinance policy rates. During this period FED fund rate eased from over 4% to near zero percent. The combination of QE and ZIRP (Zero Interest Rate Policy) regime was intended to discourage savings and push consumption with the agenda to create additional demand (for goods and services) for higher capacity utilisation, and thereafter to expand capacity; all taken, to arrest deceleration in growth, enhance job creation and to get the growth momentum back on track through aggressive dosage of monetary steroids. It has been 5 long years, and the result is yet to be realised! No doubt, the pace of deceleration is arrested but growth pick-up continues to stay diluted. The expected demand-led supply-expansion is yet to materialise. The beneficiary obviously is the financial markets; in the absence of attractive growth-investments, money started chasing financial assets across equity, bonds and commodities with most gains on the equity assets. During the period 2008-2009 to 2014, US DJI index is up by 169% (from 6469 to 17410) and S&P 500 up by 204% (from 666 to 2024) at an alarming annualised rate; tracking near-zero short-term money market rates, medium-long term bond yields dropped sharply while Gold rallied by 180% (from 680 to 1920). Despite growth pressure, Brent Crude rallied at an accelerated pace by over 250% (from 36 to 128) with combination of geo-political issues. All taken, liberal money policy provided great return to the investor community without significant pick-up in consumption and economy asset creation! India did get the benefit of global liquidity as external monies chased relatively higher growth trajectory in emerging markets and elevated money market yields. During this period from 2008-2009 to 2014, NIFTY is up by 270% (from 2252 to 8350) while Rupee down from 39.20 to 68.85 (by 75%) before stability at 58-63. It is good for Indian equity market despite struggle with structural woes from lower growth, higher twin deficits and elevated inflation adding pressure on the exchange rate, thus providing similar exchange rate adjusted return for FIIs. The take-away is that while the Government and Central Banks are still under pressure on deterioration in macroeconomic fundamentals, investors are in cheer with great returns on their monies with no worry from sluggish growth momentum!

How long this cycle will last? The extended phase of ZIRP from 2009 to 2014 is worry. There were similar phases from 2000-2001 to 2003-2004 (FED fund rate dropped from 6.5% to 1%); up from 1% to 5.25% (from 2004-2005 to 2007-2008) with short phases of near zero interest rate regime before sharp spike on monetary policy driven growth momentum. But this time, despite 5 long years of monetary support, there are limited signals of growth recovery, which should emerge as serious concern for investors going forward. Commodity assets have already taken the cues; Gold is down from 1920 to 1160 and Brent unwound gains into 82. US long term bond yields have also started inching up but finds support on extended ultra-dovish monetary policy stance of ECB and Japan. The contradictory positioning of FED and other major Central Banks is the only comfort for global investors at this stage.

What is the way forward? FED has already ended the life-line QE support with guidance of shift into rate-hike cycle in 2015. Despite other major economies in extended pause, impact of US will be felt in global markets. The start of rate-hike cycle by FED will begin unwind of the sharp 2009-2014 appreciation in equity assets and add to current bullish momentum on the USD. Commodity assets having unwound major part of liquidity-driven rally will get support on growth comfort for consolidation with diluted bearish undertone. US 10Y Bond yield will get the focus back into 3-4%. Over all, leveraged investments into financial assets will get unwound to take money off the table with limited appetite for fresh investments. Indian financial markets cannot stay ring-fenced despite domestic euphoria nor take comfort from upside momentum in growth momentum or ease in inflation or significant improvement in fiscal deficit. The immediate impact will be felt in India equity assets and Rupee exchange rate with stability in long term India bond yields. What is uncertain at this stage is the timing of shift in global tailwinds into headwinds and extent of FII exit from India, which may not extend beyond 2015-2016!? The risk on India financial assets are more when 2009-2014 appreciation is driven by global liquidity (and foreign investors) despite hawkish monetary stance of RBI, and there will be limited bandwidth for RBI to turn dovish when external headwinds emerge strong.

At this point, the guidance is to stay cautious and prudent as liquidity-driven appreciation of financial assets have gone a bit stretched and financial markets are expected to get into correction (or reversal) mode till clear signals of pick-up in growth momentum emerge to bring-in growth-driven appreciation on financial assets! May be, the extended party is in its final round for shift into consolidation mode before start of economic fundamentals driven bull phase.

Moses Harding

Markets in roller-coaster ride; shift from pain to ecstasy!

Swift back-and-forth moves within set tolerance trading zones:

Global financial markets witnessed mood-swing from shock to awe in quick time from change in investor risk-perception for shift from risk-off to risk-on for reasons beyond macroeconomic fundamentals. The first trigger was from emergence of value-buy from strategic investors, followed by global liquidity driven momentum. While FED provided hawkish guidance on the way forward through exit of QE and improved confidence on US economic growth recovery and resultant dilution in worry on the unemployment (and job creation) trend, other major economies (Euro zone and Japan) ensured availability of adequate liquidity for risk-assets! The impact on the markets is not surprise, which was to the script. DJI traded back-and-forth of set focus range of 15850-17350 (17350 to 15855 to 17395) while US 10Y bond recovered most of its risk-off rally from 2.65 to 1.90% for push-back into higher end of 2.25-2.40%. Gold swiftly unwound its recovery from 1183.50 to 1255 for push-back into 1150-1180 with low at 1161. With US seen as the best among the West, DXY sharp unwind from 86.75 to 84.50 could only establish the bullish momentum for over 86.75 with high at 87.40. Brent Crude stayed steady in sideways (despite fireworks elsewhere) at set focus range of 82.50-87.50/90 with 82.60 to 87.94 before stability around 85. While the change in investor stance from risk-off to risk-on is comfort, bullish momentum not backed by strong macroeconomic fundamentals may not be cheer for long. The current liquidity driven recovery from under-valuation (cheap-to-acquire) territory may have already moved into over-valued zone, thus diluting fresh appetite while pulling in profit-booking long-unwind into 2014 year end.

Indian markets too gained from the global euophoria combined with positive domestic cues driven by long term improvement in macroeconomic fundamentals and roll-out of policy initiatives. NIFTY nervous undertone which triggered the 8180 to 7723 push didn't last for long to trigger an awe rally over 8180 for an extended bull-run into 8350. 10Y Bond too joined the party with minor recovery from higher to lower end of 8.15/8.20-8.35/8.40% focus zone. Despite lack of clarity from mixed cues, Rupee traded back-and-forth of set NT strategic focus at 60.70/60.95-61.95/62.20; end-to-end October saw Rupee trading at 61.95 to 60.90 to 61.93 to 61.15 with October close around 61.35. The kind of back-and-forth moves seen in September-October within set ranges in alignment with underlying value of the asset is cheer to many, while speed was scary with ecstasy and awe!

Shift from under valuation to high risk premium territory:

Global markets:

DJI daily/weekly/monthly close above 17350 is bullish with firm support above 17000 and focus at 17700-17750 (extension target not beyond 17900-18100). While it is ok to be with the bullish trend, it is important to stay fleet-footed with trail-stop to protect profit. Given the depth of the euophoria (expected to stay valid into November till start of holiday season), investors will have buy-dips appetite to chase the move to its logical end.

US 10Y bond yield likely to stay relatively steady at 2.25-2.40% post the wild swing between 2.65 to 1.90%. With QE behind, attention is on timing of shift into rate-hike mode seen to be either in the 2nd half of 2015 or 1st half of 2016. Till then, "carry premium" will limit weakness for stability at inner-ring of set focus range of 1.90/2.15-2.40/2.65%.

USD is in strong bull phase from combination of economic strength (relative to the peers) and interest rate advantage; rally from 84.50 to over 86.75 is confirmation to extended bull phase into/over 88.70/89.50 in the months ahead with firm support at 86.25-86.75. Euro now in mark-time mode post the punch below 1.2450 with correction expected to stay limited at 1.2550-1.2650 for ST target at 1.1850-1.2050. JPY sets focus beyond 113.75 on heavy dose of liquidity and interest carry play.

Gold has lost its safe-haven appetite given the kind of value-buy opportunities in financial assets. Despite reversal from set sell zone of 1250-1265 into 1160, undertone is weak for extended weakness below 1135-1150 while 1185-1200 stays safe to retain short term bearish momentum into 950-1000 where long term value buying appetite would emerge.

Brent continue to stay weak despite strong reversal from over $115 to 82.60, thus retaining bearish momentum into lower end of 77/80/82-88/90.

Domestic markets:

NIFTY continue to look good despite strong rally from 7723 to 8350; recent leg of rally over 8150-8300 triggered by external liquidity/appetite. While the near term outlook is positive into 8450-8500 on rate-cut pressure on RBI, it would be high risk chase over 8500, hence prefer push-back into 8150-8200 for rest of 2014 consolidation at 8150/8200-8450/8500.

Despite excessive system liquidity, soft overnight/short term money market rates and 25-50 bps rate cut (in the next 1-3 months), 10Y bond is seen heavy at 8.15-8.20%. All cues taken, prefer rest of FY15 stability at 8.15/8.20-8.35/8.40% (maintaining 5.85-6.0% spread with US 10Y bond yield).

Rupee steady around mid-point of 60.95-61.95 focus zone; given the combined impact of global & domestic cues, prefer gradual weakness into 61.95-62.20 by end Dec'14 and 62.85-63. 35 by end Mar'15. See major risk on Rupee from interest rate and dilution in FII appetite (as India assets tend to be seen as over-valued into Budget 2015).

Strategy for rest of 2014 and into Budget 2015:

It is obvious that shift from cheap-to-acquire to hot-to-hold valuation is driven by global liquidity and NaMo optimism. While the confidence of growth pick-up and significant improvement on macroeconomic fundamentals is high, there is lot to be done to get into execution mode for realisation of benefits at ground level. It is important to stay prudent (and fleet-footed) on move into high volatile (make-or-break) period of December to February. When the value is hot2hold, any event risk or disappointment can risk deeper correction, hence sensible to end 2014 in cheer with prudence overcoming the greed!

Moses Harding