Budget FY16: Consolidation mode before building scale (for better impact)!

Neutral impact from combination of fiscal and monetary set up

Economic Survey said it before the Budget FY16, on compromising fiscal prudence for investment allocation for growth. It is not a surprise that when revenue leakages is huge (against window dressed fiscal deficit number over previous years), it is tough to make both ends meet; targeting FY16 fiscal deficit at 3.6% and making monies available for investments. It is hard fact, but real! The agenda therefore is to plug revenue leakages; money not lost is revenue earned! There are lot of measures to improve revenue monitoring (and collection) efficiency to arrest big time slippage and avoidance. Another good measure is to take out the non-financial assets in the system to make it interest earning for the investor and putting the asset to work; need to look at the execution bottlenecks. If it works, it is good upside (both from investment and consumption) for economic capacity expansion. Budget FY16 has not absorbed the huge upside from coal and spectrum auctions, thus keeping sufficient room to deliver pleasant surprises by beating set targets (and high expectations). All taken, will give the benefit of disappointment to Mr.Jaitley for being real and upfront without attempting to give ambitious projections, and will give one more year for cleansing the administration with effective governance before catching up! Black money, tax avoidance and benami assets have been tolerated for long, and efforts to eradicate them is long term advantage for the economy, and it is worth a 1 year wait for fiscal prudence.

It is also ensured that RBI does not see this as risk (from higher fiscal deficit) to pursue dovish monetary policy. The retention of CPI tolerance level at 6% (against current 5%) is direction to RBI to move ahead with baby-steps rate-cut (despite higher FY16 fiscal deficit estimate), aligning Repo rate at 1.75-2% spread over actual CPI print. RBI should also take comfort from steady net market borrowing of Rs. 4.5 Trillion, not seen as big burden on the system when FII flows will be in plenty against huge $ appetite from RBI, infusing Rupee liquidity in the system. Both fiscal and monetary dynamics combined, there is no major risk on the economy to send negative vibes to stake-holders.

Thrust on infrastructure on expected lines

The thrust on infrastructure is visible through higher allocation of funds and efforts to make alternate products viable (and attractive) to investors through tax and return efficiency. The FY16 growth momentum is heavily dependent on infrastructure revival (of existing projects) and capacity build-up to support manufacturing and agriculture sectors. FY16 growth momentum is skewed towards what happens in infrastructure sector with plenty of opportunities, challenges and risks.

Disappointment from short of bold reforms and "out of the box" innovation

The Government had to play with limited band-width, while in struggle to push crucial reforms in the Parliament. The strategy is seen to keep it simple (and pro-investment) and stay in consolidation mode for 1-2 years till the number game in Parliament gets better; makes sense! The intent therefore is to stay liberal on rules to attract investments in the next 2 years, before review of off-shore investment policies. This is big positive to open up long term, sustainable (and accelarated) liquidity flow into India now. The concern is from not doing much to make doing business easy in India. Beyond finance (and investments), there is no focus on other irritants (from land, labour, legal etc) that keep investors in wait-and-watch mode.

Matter of fact adjustments in taxation rules

There are minor adjustments thrown here and there with "net-net" insignificant impact. The intent however is to keep taxation rules simple, remove ambiguity (and complexities) and bring transparency (and clarity). The upside here is huge from two counts - one from squeezing the black economy and plug leakages from the white economy. When this is achieved, there will be room for rationalisation to push down tax rates. Till then, cosmetic touches is done to tax the super rich (and the affordable class), and being bit liberal on the middle tax (to put more monies in the hand for investment and consumption).

Government is seen to be planning for long-haul play (for minimum 10 years till 2024), hence taking time to settle down for consolidation

The Government is not seen to be in a hurry seeing a Cricket Test match kind of opportunity ahead, when opposition is down and out. The agenda therefore is on "house keeping" and set up strong platform (as catalyst) to build accelerated growth momentum in the years ahead. The investor (and consumer) confidence is from steps to set up of clean administration, effective governance for higher economic efficiency.

Above average performance score

Mr.Jaitley played for the average score this year considering as work-in-progress for distinction and 10/10 before Budget FY19 (ahead of next election), thus setting up slow but steady pace for long-haul marathon race. Performance evaluation exercise covers both what is delivered and expectations (and capabilities) ahead. While giving an average 5-on-10 for what is delivered, I would tend to add another 3 for what is in store ahead. It is an 8-on-10 rating for the Finance Minister for being real now (FY16-FY17) and building optimism for turning efficient in the years ahead!

Bullish consolidation in financial markets 

All taken, there is nothing to panic on India financial markets. There is nothing to fear or cheer on equity markets, thus into consolidation mode. See NIFTY in consolidation at 8700-9200; support is from pipe-line rate-cuts and resistance is from stretched valuation, hence prudent to play end-to-end. Bank NIFTY is set for consolidation at 19000/19250-20500/20650.

10Y Gilt retains bullish momentum. The outlook is for shift of consolidation range at 7.45-7.55 by on or before first week of April (from current 7.65-7.75%) enroute to 7.25-7.35% in the second half of 2015. Most cues from dilution in growth-inflation conflicts and favourable demand-supply dynamics support bullish momentum ahead.

Rupee bullish undertone gets only better as USD gains everywhere else. Retain USD/INR focus at 61-62 (within the well established long-term strategic support at 58.00-58.35 and resistance at 63.65-64.00. The only risk on Rupee is from the extent of RBI $ bids, as all other factors are supportive to sustainability of Rupee bullish momentum, which would open up bullish extension beyond 61 into 59.50-60.50.

So, Budget FY16 is out of the way giving comfort to stake holders to retain the India optimism; next big event is the 25 bps rate cut on or before 7th April. Stay positive with prudence.

Moses Harding 

India Gilts outlook: Extended bull run on more rate cuts ahead!

Repo rate at 7.0-7.25% is certain and soon!

The FY16 CPI forecast is at 5.0-5.50% and RBI's formula (to give decent inflation adjusted return to promote financial savings) for Repo rate setting is 1.75-2.0% over the CPI rate. This says it all without any ambiguity! The comfort is also from January CPI print at 5.1% and February print expected to be sub 5% from low prices of imported commodity items. Combination of stability in commodity prices, strong Rupee and absence of demand-push impact are good reasons to give medium to long term comfort for extended CPI relief into 4.0% (lower end of 4-6% comfort zone). The only risk factor is from the usual March (end of FY) syndrome - tight liquidity and temporary spike in near term money market rates before stability at start of FY16. Having said this, it does not make sense to sell long-dated Gilts (to lend in short term money market), when there is clarity of 30-40 bps upside from current level. Combination of CPI outlook and RBI formula, range for Repo rate through FY16 is 6.75/7.0-7.25/7.50%. This sets up immediate 25 bps rate-cut on or before 7th April policy review to shift 10Y bond focus range from current 7.70-7.75% to 7.45-7.55%. Beyond there, dynamics remaining unchanged, see Repo rate at 7.0-7.25% between July-September 2015 driving 10Y yield further down into 7.20-7.35%, seen as end of rally completing the chase from 8.50-8.65%. It is better for RBI to get this done soon, when Banks shift appetite from risk-off Gilts to risk-on credit.

All taken, despite pressure on Call money rate (causing negative carry for some time), it is good to stay invested at 7.73-7.75% (extension is God-sent) awaiting in patience for 7.45-7.55% ahead of 7.25-7.35%; it may not be an extended wait, though! For now, allow sideways at 7.68/7.70-7.73/7.75% before shift into 7.40-7.55% soon, not later than 1st week of April 2015.

Stay with the bull run riding the combined advantage of favourable demand-supply dynamics and rate direction.

Moses Harding

USD/INR outlook: Rupee bull run gaining steam!

All cues in favour of Rupee, only RBI against!

Rupee recovery from 62.45 into 61.70-61.85 despite strong $ against global currencies and sustained $ purchases by RBI is sign of extended bullish momentum into 61.20-61.35 and beyond into 59.50-60.50. The stake-holders got jitters post the sharp weakness from 61.30 into set 62.20-62.45 support zone (12M $ resistance zone of 66.85-67.00), but $ couldn't hold its strength there on strong FII supplies and lead-lag play in the forward market absorbing elevated FX premium. Over all, it is back-and-forth play at set focus zone of 61.20/61.35-62.35/62.50 (12M $ at 65.50/65.65-66.85/67.00). What next?

I am unable to see one reason that could go against Rupee. India fundamentals stay firm retaining FII appetite, with no worries on dilution or exit. Interest rate play will continue to remain in favour despite 50-75 bps rate-cut in pipe-line. There is no major risk on Rupee despite squeeze in India-US yield differential on sustainable easing on India inflation. Importers are in no hurry even to cover ultra near-term liabilities seeing opportunity loss every time. All taken, RBI is the only risk factor against Rupee with the objective to cushion excessive Rupee appreciation. Till the going is good, RBI is ok with baby-steps Rupee appreciation, and the good is expected to stay for long!

The strategic play is now shifted to 60.95/61.20-61.95/62.20 with bias into 61.00 and beyond; hedging strategy, if at all importers wish to cover, could be based on short-term stability at 59.50-62.50. Believe exporters are in comfort post hedge of receivables while 12M at 68.00-68.50 and now at 66.85-67.00; those who have not, can track 12M $ at 64.00/64.50-66.35/66.85 for hedge strategy.

EUR/INR relief from 68.00-68.25 lost steam at set end of correction zone at 71.00-71.25; U-turn from there has hit the 1st objective at 69.00-69.25. The tone remains weak at 68.00/68.25-69.75/70.00 with short term objective at 65.00. Exporters were cautioned not to stay open, and EUR/INR is already down from 80.00 since mid December 2014, while it is manna from the heaven for importers and carry-trade play.

Rupee is the strongest of all and there are no signs ahead to give up this position in a hurry; till then, ride the Rupee bull wave with risk only beyond 62.50 against the USD and 71.25 against the Euro.

Moses Harding

Budget FY16 : Time to keep investors appetite ahead of populist interest

Budget Priorities to revolve around growth (in core sectors) and revenue expansion

Financial Budget is all about making both ends meet, with basic objective of not borrowing to fund unproductive consumption. India has been doing this all these years, and it is time to change with the theme of "borrow and invest for growth" to retain the pent-up optimism on India. In this sense, it will be a "make-or-break" Budget 2015 for FY16. The change has to be from combination of cost rationalisation, capacity expansion and revenue maximisation. The external factors continue to stay supportive; cues (and expectations) from prices of imported commodity items and availability of external liquidity stay in favour, and what matters now is to establish pull impact from domestic cues (and developments). The outcome has to be a combination of policy initiatives and tax rationalisation to create opportunities for investment where it is in critical need, and to dilute the risk with desired reward for shift of investors (and lenders) appetite to core sectors. It would mean lowering the net yield/return on risk-off assets and dilution of risk premium on risk-on credit. This Budget is all to do with creation of desired growth capital (equity & debt) for capacity (and revenue) expansion.

Fiscal prudence is not risk in play

It is given that the FM is not going to surprise the markets with upward revision in fiscal deficit estimate; FY15 target at 4.1% of GDP is sacrosanct (red-line can't afford to be breached) and FY16 estimate at 3.6% not seen as ambitious; small push to "business-as-usual" combined with supportive external tailwinds will help to achieve this. The "awe" feeling will emerge from delivery to "what more" expectation build! For this, it is important to focus on cost rationalisation (cutting subsidy burden, reducing interest cost of borrowing, building financial efficiency, measured by expense versus revenue ratio, growth/revenue expansion through higher utilisation of invested capacity, building higher consumption for capacity expansion and removal of leakages in revenue collection (through higher and efficient coverage). It is all about creating opportunities that would earn to the exchequer more than what is spent for the purpose, and to build public sector efficiency to generate desired return on their investments. The "awe" vibes will be from rationalisation of unproductive costs and squeezing monies for productive investments.

Concerns on creation of viable investment opportunities and flow of public money remain a worry

It is all about bridging demand-supply dynamics through investor-consumer behaviour (and appetite). The issue arises from putting to work the private monies lead by public investments, which will in turn open up the external FDI flood gate. Most domestic private liquidity is either parked in unproductive non financial assets (real estate and Gold) or invested in risk-off sovereign and/or AAA corporate assets, while FDI supply is miniscule to the demand. It is less said the better on public monies; surplus cash with Navrathna PSU entities are idle, while Government continues to stay in "borrow for consumption" mode. Diverting domestic liquidity into where it is needed, providing business viability (and feasibility) comfort to external investors (and lenders) and creating budgetary band-width to divert public investments into core sectors are essential to convert the pent-up India euophoria for shift into "walk-the-talk" mode. The system demand for liquidity (equity & debt) is huge, and key to success is by bridging the need with adequate (and desired) supply. The expectation from Mr.Jaitley will revolve around these themes of expansion of private investments in financial assets, divert private monies to core sectors through shift of risk sentiment from off to on and ensure adequate Government/Public sector funding to sectors where demand is not met with adequate flow of liquidity for whatever reasons.

Removal of irritants to make India the best place for doing business to realise the "Make in (and for) India" dream

Lots have been said by experts on measures (across policy, regulatory and administrative initiatives) that would need to be executed to make India a great place to do business; none put monies for love of the country, it would need comfort on capital protection and desired return on the risk capital, obviously more than what it earns on risk-off assets. The issues are across end-to-end from hurdles to bringing in the money for investment, managing the productivity of the business (and assets), removal of inefficiencies in "all adjusted for" returns from the business and ensuring smooth exit to take profit off the table. The resolutions need to be across tax, labour, legal and other irritants in the system. The investor (and lender) community is confident (and clear) on the emerging opportunities, but yet to get the comfort on realisation of desired return on the capital. The monies (domestic and external) are in wait and watch mode at the doorstep and if not pulled in now, it would flow to other destinations (or continue to stay in risk-off assets) causing severe dent on the India euphoria. It is now or would become too late for economic revival, thus hurting social well-being beyond repair.

Focus on consumption pick-up at the mid to lower end of the pyramid

The consumption dynamics revolve around more than 90% of the population in the mass affluent and not affordable categories. It is to do with creation of jobs and putting more monies in their hands for consumption. The hype in financial inclusion at the lower end of the pyramid can't be effective unless surplus monies are there in their pockets to save (or invest) or possess necessary skill sets to encash emerging business opportunities to borrow for putting the money to work; therefore, the intent of financial inclusion has to extend beyond conducting cash less financial transactions to creation of demand for and supply of monies from un-banked and under-banked population. It is not a chicken-and-egg story, as it is obvious that only domestic consumption led economy can stay sustainable over longer time.

Focus on infrastructure, manufacturing and agriculture sectors is the trigger

While the financial and technology infrastructure is relatively robust, economic and social infrastructure lag behind. The issues around economic infrastructure like Road, Power, Port (and related transport logistics), SEZs etc are many; it is less said the better on social infrastructure like water, affordable housing, health (and related basic hygiene), waste management etc that would make living in India comfortable.

The problems around economic and social infrastructure are many, which would engage revival of existing projects and simultaneously expand capacity. It is all to do with policy measures (and execution) and ensuring desired flow of equity & debt capital, giving adequate comfort on returns and at affordable cost. This is where the challenge lies; if this is achieved, major hurdles will be behind. If the coverage is expanded to manufacturing and agriculture sectors, there will emerge hope for realisation of pent-up euphoria at ground level for tangible impact.

High time for Arun Jaitley to make believe Narendra Modi mantras

The system stake-holders have heard a lot from Modi to set up current euphoria and sharp re-rating in Indian financial markets since February-May 2014. The noise around "red tape off and red carpet on", ensuring "good and effective governance", building "skills, scale at great speed", "Make-in-India" ambition to boost investments for export growth, federal and cooperative collaboration with State Governments, and establishing strong bond with global heavyweight economies etc have to get translated into tangible and quantifiable executive actions. All taken, expectations from stakeholders are high and it is important to avoid sending "shock vibes" given the limited band-width to deliver "awe feeling" in the 1st full budget of the new Government. The post-budget impact on financial markets will be neutral if unpleasant surprise signals are avoided. An out-of-the-box budget with bold measures (staying light on populist measures, avoiding playing to the gallery) will be good to restore bullish consolidation ahead.

Impact on fnancial markets: neutral bias

India equity market is seen in consolidation mode with NIFTY at 8450/8600-9000/9150 and Bank NIFTY at 18200/18450-19650/19900, break-out either-way not expected to sustain.

India 10Y benchmark bond yield seen steady at 7.50-7.75% on high probability of delivery of 25 bps rate-cut on or before April monetary policy review. Meeting fiscal deficit target and resultant lower demand for funds from the market are positive when demand is in plenty.

Rupee seen firm (against RBI appetite for USD) at 61.20/61.45-62.20/62.45, not ruling out minor risk of pressure into 63.00 before establishing stability at 61-63.

All combined, vibrant Narendra Modi will ensure that Budget FY16 provides positive signals to global rating agencies to get comfort on the sustainability of improving macroeconomic fundamentals (dilution in growth-inflation conflicts) for sovereign rating upgrade in 2015. While it is not sensible to stay over-weight, it is prudent to stay neutral (to light) in the absence of run-away moves either-way! In all probability, Budget FY16 may go non-event delivering to expectation on fiscal prudence, economic capacity expansion, investor (and consumer) confidence and establishing growth momentum into higher end of 5.5-7.5%.

Let's hope for the good, if not the best!

Moses Harding 

Gilts market: Outlook for the week 23-27 February 2015

India 10Y retains bullish undertone

India 10Y benchmark bond 8.40% 2024 traded to the script since previous RBI monetary policy; despite rate-pause (and SLR cut), support at 7.75% was rock-solid for push into lower-half of set near-term focus range of 7.65-7.75%. The bullish undertone is also evident from loss of traction with spike in US 10Y Treasury yield from below 1.60% to over 2.10%, thus squeezing the India-US yield spread from over 6% into 5.50-5.60%. What next?

RBI is under pressure to deliver the next 25 bps rate-cut before April monetary policy review date. January 2015 CPI print at 5.1% (against RBI expectation of 6%), and Rupee resilience to USD strength (against global currencies) & India-US yield squeeze are strong cues for RBI to ease Repo rate from 7.75% to 7.5% before end of FY15. RBI should "walk-the-talk" aligning the Repo rate with maximum spread of 2% over the CPI print to cut appetite on Gilts, and to enforce shift of excess SLR to productive credit. The expectation of best case scenario not beyond 7.35% will trigger this purpose (with Repo rate pause at 7.25%).

For now, it is time to review the near term focus at 7.50/7.60-7.70/7.75% with most trades at inner-ring till RBI rate-cut action. It is good to retain "long" entry at 7.75%, adding at 7.70-7.75% for 7.50-7.55% (ahead of 7.35%), tracking squeeze in India-US yield spread at 5.35-5.60%.

Have a great week ahead!

Moses Harding

Currency market: Outlook for the week 23-27 February 2015

Rupee in solid form despite RBI brakes

Rupee retains bullish undertone despite several risk factors in play; post the sharp reversal from 61.29 to 62.45, it is in administered mode at 62.10-62.45. USD/INR is firm around 62.10 deriving support from importers (hedging end Mar'15 $ at 62.50-62.65 to stay guarded against sharp upside adjustment) and RBI $ bids (evident from record high reserves), while exporters provide protection at 62.45 covering end Mar'15 at 62.85-63.00 and carry-trade interest around 12M $ at 66.85-67.00. What next?

The positive cues are from abundant supplies in cash market (by FIIs) and lead-lag play in forward market (by exporters & importers); combination of confidence on India equity & bond assets and elevated FX premium, is strong to retain Rupee bullish rhythm. Beyond here, more bullish cues; are in store from pro-growth/fiscal prudence FY16 Budget, pipe-line rate-cut and sovereign rating upgrade. All taken, the market dynamics is skewed towards net $ supplies (cash & forward supplies against cash demand), and RBI seen to administer demand-supply equilibrium absorbing excess $ supplies. The hedging strategy is in favour of hedging short term (1-2 months) imports at forward rate of 62.50-63.00 and covering medium/long term (3-12 months) at forward rate of 64-67/67.50. All combined, see Rupee stability at 62-63; break-out risk is from release of brake by RBI (shifting focus to 61.00-61.35) and FII unwind (diluting Rupee bullish momentum for weakness into 63.65-64.00). Having said all these, Rupee resilience to India-US yield squeeze can't be taken for granted beyond a point. 10Y Gilt spread at 5% (India at 7.35-7.50% and US at 2.35-2.50%) is seen as the breaking point while India inflation stays at 4-6%, with caution that the best from Brent Crude price impact is behind. Taking all these long term cues in play, it is prudent to track spot moves in alignment with 12M USD/INR at 65.50/66.00-68.00/68.50, and have close watch on FED rate action and its impact on DXY. For the week, retain focus at 61.95/62.00-62.45/62.50 with bias for back-and-forth play, break-out either-way difficult to sustain.

EUR/INR is in back-and-forth mode at 70/70.25-71.00/71.25 (within big-picture focus at 68.00/68.50-72.00/72.50). In the near term, see strong resistance at/below 71.00 with build-up of bearish momentum into/below 69.00-69.50. It is not the time to keep near/short/medium term exports open, given the combination of bullish undertone in USD/INR and bearish pressure on EUR/USD.

USD retains its bullish consolidation mode against major currencies

It is no surprise to see DXY in back-and-forth mode at 93.50/93.65-95.00/95.15 (within set near-term big-picture at 93.25-95.50). Not withstanding temporary near-term relief from Greece risk factor, short/medium/long term cues would emerge in favour of the USD; bias therefore is for upside break over 95.50 into 100 in the short/medium term. For now, see no reasons to review the set focus at 93.25-95.50, not ruling out set up of bullish momentum for push over 95.50.

EUR/USD is steady at 1.13-1.1450 (post the recent recovery from 1.11 to 1.1525). The best case scenario is seen for near-term consolidation at 1.10/1.1075-1.1450/1.1525 before break down, while major Central Banks will resist extended weakness below 1.10 to avoid pulling parity into focus. It is prudent to stay end-to-end in back-and-forth play.

USD/JPY is seen stuck at 116/117-120/121, with no major cues to trigger break-out either-way. There are no cues to review set strategic big-picture focus at 115/116.50-123.50/125.

Have a great week ahead!

Moses Harding

Global equity markets: Near term outlook

India equity markets nervous on delay in realization of expectations:

India equity market gave thumbs up to expectation of change of guard in the Government, building hope (and optimism) on Narendra Modi. Since February 2014 (on run upto May 2014 General elections), NIFTY has rallied by over 50% (from 5933 to 8966) while BNF has outperformed with over 110% rally from 9944 to 20907. During the same period, DJIA index is up by only 18% from 15340 to 18103. From these data, it is obvious conclusion that stake-holders have built euophoria around execution capabilities of Narendra Modi with foreign investors leading from the front, going for the kill. It is not surprise to see loss of momentum in the euphoric rally in the absence of delivery (to over expectations) and resultant delay in realisation of beneficial impact on the ground. At this stage, there is lot of noise around, with Modi working on establishing linkages with investors (global and domestic) to pull monies to expand capacity and consumption. The pipeline positive cues from rate-cut and India sovereign rating upgrade has set up strong base in NIFTY above 8450 (ahead of worst case scenario of 7950-8075), while BNF is firm above 18200 (ahead of 17500). The major uncertainty however is from foreign investors appetite on India equity against US economic revival and resultant shift into rate-hike cycle by the FED.

What next? Limited upside, but no fear of significant reversal

Is the NaMo re-rating gone beyond reality? The uncertainty ahead is the extent of bullish extension beyond all-time high in NIFTY at 8996 and BNF at 20907. More the delay in delivery to expectation will lead to unwind of post-NaMo rally (NIFTY into 7100-7400 and BNF into 14350), but do not see risk this far at this stage with firm short term base in NIFTY at 8450-8600 and BNF at 17500-18200 (seen as cheap-to-acquire for long term strategic play); cues in favour are from improved macroeconomic fundamentals, dilution in growth-inflation conflicts and adequate external appetite on India, seen as relatively safe-haven among emerging (and developed) markets. All taken, it is prudent to retain strategic focus on NIFTY at 8450/8600-9000/9150 and BNF at 17500/18200-20300/21000. It is possible that any rally driven by rate-cut and/or rating upgrade will be short-lived till the Government gets into "walk-the-talk" mode to set sustainability beyond 9000 in NIFTY into 9500-10000, seen optimistic at this stage. As of now, have set NIFTY at 8450-8600 as cheap-to-acquire zone and 8850-9000 as hot-to-hold zone for strategic play; don't see cues to review this approach, but stay in hope that positive vibes in the Budget 2015 could lead to shift of hot-to-hold zone from 8850-9000 to 9150-9300 while disappointment would trigger reversal below 8450 into 8000-8150. Both combined, big-picture range is set at 8000/8150-9150/9300 for rest of FY15.

DJIA is in consolidation mode as per script with back-and-forth play at set near-term focus range of 17000/17100-18000/18100; since mid-Dec'14, have seen moves from 17069 to 18103 to 17037 to 18052. The tone ahead is mixed, but seen good to review the near term focus at 17500/17600-18500/18600 for back-and-forth play. This outlook extend support to India equity market to dilute bearish momentum from domestic cues.

Over all, the visibility ahead is not clear while investors look for earnings to catch up with stretched valuation. Hence, the need to be cautious and stay fleet-footed given the lack of conviction on directional bias.

Moses Harding

India financial markets: Special update

What goes up in defiance to gravity can not hold for long!

India financial markets got support from all corners since mid 2014; domestic cues (across political, economic and monetary dynamics) are euphoric and external tailwinds (from liquidity and low commodity prices) are strong. If zoomed in to short term (since mid December 2014), markets had glorious run; NIFTY up by 13% (from 7961 to 8996) and BNF up by 19.5% (from 17502 to 20907). In the meanwhile, 10Y bond rallied from over 8.15% to 7.65% and Rupee up from 63.62 to 61.29. Needless to say, the dream-come-true rally defied fundamental gravity for push-back to adjust for ground reality. AAP emergence of power house in Delhi is just a reason to cause this adjustment. The worry is that the January 2015 euphoric rally in equity assets is mostly unwound;  BNF already below 2014 close of 18736 and at striking distance of 2015 low of 18211 (with push-back from 20907 to 18226) and NIFTY unwind from 8996 finding support above 8450, at distant away from 2014 close of 7961 and January 2015 low of 8065. Rupee is relatively resilient with unwind of intra-2015 rally from 63.62 to 61.29, finding support at 62.20. The best-in-class asset is the 10Y Gilts retaining stability at 7.65-7.75% despite blood everywhere. All taken, stakeholders got plenty in January to cover for the entire 2015, while it is pain for those who didn't take money off the table, and worse for those who tried to catch the greasy tail!

Nothing to panic, it is yet another opportunity for strategic play

India macroeconomic fundamentals stay positive (and solid) for Narendra Modi to script and build the scale up vision. The base is seen firm with GDP growth number over 7% (on revised methodology) and CAD outlook sharply down into 0-1% of GDP. Inflation and fiscal deficit expectation is not bad to trigger concerns. RBI is also expected to retain its baby-steps growth-supportive monetary stance. All taken, India sovereign rating upgrade is not distant away. The worry is from delay in delivery to the optimistic expectation from Modi; it is the impatience from the stake-holders (whose mindset is tuned to "fast-food" and e-commerce delivery speed) creates excessive (and make-or-break) price volatility. The 9 months of Modi regime is not spectacular on the ground, but effort (and intent) is splendid. There should be no regrets (on post-Modi re-rating on India assets since mid 2014) from value creation on NIFTY (up from 6650 to 9000) and BNF (up from 13000 to 21000). Modi will be seen under pressure for delivery (post Delhi election debacle), which is seen as good for the system. This should reflect in Budget 2015, to set up the next round of bullish momentum.

Equity assets not far away from cheap to acquire valuation zone

The expected correction in NIFTY from 9000 to 8600 extended into 8450 (low at 8470), and ditto in BNF from over 20650 into 18600 (low at 18226). The comfort however is from NIFTY consolidation at 8450-8650/8700 and BNF at 18200-19000. What next? There is nothing to panic as events ahead are positive; structural adjustment of over 50% of rally since mid-Dec'14 will stay resistant to extended correction below 8450 (NIFTY) and 18200 (BNF). It is prudent to stay positive ahead of Budget 2015, while awaiting sovereign rating upgrade in H1/FY16. For now, watch strong support at/above 8350-8420 with worst case not beyond 8185-8265, with firm resistance at 8735-8750 ahead of 8850-9000, short term resistance zone. There are no cues to review the set post-Budget 2015 big-picture at 8200/8450-9000/9300, while retaining focus on BNF at 18200-19600/20000.

Gilts seen in extended bullish consolidation mode

India 10Y bond stood firm at 7.65-7.75% despite strong headwinds around from bearish momentum on Equity & Currency and spike in US 10Y from 1.60% to 2.0%. There is also risk of slow-down in rate-cut pace going forward taking comfort from higher adjustment in GDP growth number (at over 7%). It is possible that monetary system will go into extended pause with Repo at 7.5%, covering one more 25 bps cut in April-June 2015. All taken, retain stability at 7.65-7.75/7.80%, break-out either-way not expected to sustain for now.

Rupee in comfort with most cues in support

Rupee in consolidation mode shifting focus between 61.20-61.35 and 62.20-62.35 in alignment with 12M $ at 65.50-65.65 and 66.50-66.65. Despite external woes (and resultant firm USD against global currencies), Rupee derives support from robust external inflows and elevated FX premium retaining forward market in $ supply driven mode. RBI did extend support to the $ at 61.20-61.35 and is expected to support the Rupee at 62.20-62.45 to retain Rupee price-stability, while the system is in the mode of attracting FDI flows. For now, retain focus at 61.45/61.70-62.20/62.45 in back-and-forth mode; LT break-out bias unchanged for Rupee recovery below 61.20 into 59.50-60.50. The long term hedging (and carry-trade) strategy is tuned to 12M $ range at 64.00/64.50-66.50/67.00.

EUR/INR is in consolidation mode post mid-Dec'14 fall from 80.00 to 68.17; recovery from here finds resistance at 71.00. While the short term tone is bearish for 65.00, prefer near-term consolidation at 68.00/68.50-72.00/72.50. Exporters with Euro receivables need to stay prepared for EUR/USD weakness below 1.11 (into 1.0650 ahead of parity) against USD/INR stability at 60-63.

Moses Harding

Indian markets: post-policy & pre-budget update

Domestic cues: wait-and-watch mode

Governor Rajan has set the road map ahead for next round of rate action. The attention will be on January-March 2015 CPI print and fiscal deficit achievement for FY15 and target for FY16. Given the set benchmark of 1.5-2% spread between Repo rate and CPI print, the next rate cut is dependent on CPI print ease below 5.5% with benign expectation into 4-5% in FY16. This is not enough; FY15 fiscal deficit has to stay below 4.1% of GDP with FY16 estimate at/below 3.6%. In all probability, next rate action is seen to be distant away in April monetary policy review meeting, and not immediately post Budget 2015.

Global cues: risk-neutral mode

The pent-up bearish undertone on developed markets is seen to have diluted, and into consolidation mode; DJIA seen in comfort at 17000/17100-17600/18100, US 10Y Treasury yield at 1.50/1.60-1.90/2.0% and DXY losing steam over 95 for push-back into 93.50. Brent recovery from $45 into 55-60 and Gold losing shine at 1300-1310 for unwind into 1250-1260 are positive signals for shift from risk-off to risk-neutral mode. All taken, impact from global cues on India financial markets may not be significant to cause worry.

Gilts yield adjust to zero carry

Combination of rate-pause and 50 bps SLR cut has shifted focus in 10Y Bond yield from 7.65% to 7.75%. Most cues remain firm to retain short term trading range at 7.45/7.50-7.75%, valid till end June 2015. Liquidity will be in plenty with RBI in $ buy mode (in support of $ at 61.10-61.35) releasing Rupees into the system. Despite excess baggage, DII/FII appetite for Gilts will be in plenty at/over 7.75% for over 13% annualised yield play from now to June 2015. All taken, see near-term (upto Budget 2015) price-stability at 7.65/7.70-7.75% (for zero-carry at Repo/CBLO counter); break-out either-way not to sustain.

Equity assets in consolidation mode

NIFTY complete back-and-forth mode within the set pre & post policy range of 8750-9000 (with 8727 to 8996 to 8726 moves); expected fill up of gap at 8727/8761-8827 is done. What next? The long term bullish undertone is intact; uncertainty is from extent of bullish consolidation with immediate support at 8750-8775 ahead of major one at 8600-8650, which should hold to retain bullish rhythm. On the other side, see major near term resistance at 8830-8865, ahead of Budget 2015. For now, set focus at 8650/8725-8825/8900 for back-and-forth play, break-out either-way is tough to sustain. Strategic players (post exit at 8965-9000) can reinstate book at 8725/8675/8625 (stop below 8600) for 8965-9000 revisit by April-June 2015. Combination of domestic optimism and dilution of bearish momentum in external sector is good to retain long-term focus at 8600/8650-9000/9300.

Bank NIFTY is sharply down from below 21000 to 19100, adjusting for stretched valuation, and now at gap-up zone of 15th January 2015 at 18600-19350 with major support at 2015 low of 18211 and mid Dec'14 low of 17502. For now, set focus at 18600/18800-19800/20000 in consolidation mode, retaining long term bullish momentum into 20650-21000.

Rupee in administered regime by RBI

Rupee retain its strong bullish rhythm post sharp recovery from January 2015 low of 63.62 to 61.29, before consolidation at 61.50-62.00. Most cues stay in favour of Rupee from economic and monetary dynamics, with RBI in standby to maintain demand-supply equilibrium, now seen at 61.20/61.35-62.05/62.20. With abundant FII appetite and supply driven mode in the forward market, bias is on extended Rupee recovery below 61.10, RBI willing into 60.50 ahead of 59.50. The spike in 12M FX premium from 6.85% to 7.10% post-policy stay as catalyst to Rupee bullish undertone. The hedge play in 12M $ at 65.50-66.50 add to spot stability at 61.20-62.10 till shift of focus on spot move below 61.10 into 59.50-60.50 (12M $ at 63.50-64.50). All taken, importers can stay in comfort (risk only above 62.10-62.35) while exporters seen in hurry absorbing temporary weakness into 61.95-62.20.

EUR/INR recovery from 68.00-68.50 has met set target at 70.50-71.00 on the back of EUR/USD back-and-forth mode at set NT focus range of 1.11-1.1450. While USD/INR outlook gives comfort to short the EUR/INR, extent of EUR/USD extended recovery beyond 1.1450-1.1475 is uncertain, hence need to stay in caution for fleet-footed play. However for strategic hedge play, it is good to sell EUR/INR at/above 71.00 chasing the short term bearish undertone on the EUR/USD below 1.11 into 1.0750 (EUR/INR at 65.50-66.50 against spot USD/INR at 61-62).

Moses Harding

RBI in cautious (and investor protection) mode!

Lack of comfort on inflation with the need to maintain decent real rate of return:

RBI is definitely not in cheer to deliver 2 successive rate cuts in less than 20 days! The reason is attributed to retain operating policy rate at 1.5-2.0% spread over the expected CPI inflation, seen by RBI steady around 6%. This sounds logical, but the worry is from lack of optimism on the guidance with outlook for favourable trending into the lower end of set comfort zone of 4-6%. The hope of next baby-step 25 bps rate-cut is now shifted to post Budget 2015 in the first week of March 2015 for end of FY15 Repo at 7.5%!

The sweet coat on the bitter pill is the 50 bps cut in SLR from 22% to 21.5%, retaining HTM at 24%; expect HTM reduction at 23.5% retaining 2% concession. When the draw down from Repo counter is not significant to the excess SLR held by Banks, SLR cut is non-event, seen as guidance to shift appetite from risk-off Gilts to risk-on productive credit.

All taken, RBI's concerns (and worries) on Rupee-Interest rate dynamics is not diluted, on the back drop of strong dollar (against global currencies) and downside risks on global economy (and risk-on financial assets). The intent is not to squeeze the rate differential between India and rest of the world, which could dilute FII appetite for India bonds and build bearish momentum on Rupee. 

It is another month of market stability; NIFTY at 8650/8700-8850/8900, 10Y bond at 7.65-7.75% and Rupee at 61.25-62.25. The attention will now be on Budget 2015 (watching growth - fiscal deficit dynamics) and January 2015 CPI print (watching trend down into lower end of 5-6%); if all goes well, expect Repo rate reduction to 7.5% in March and providing clarity on the timing of next round of reduction into 7% during April-September 2015.

Nothing to panic, the dust has settled now for rest of February (ahead of Budget 2015) driving financial markets in consolidation mode!

Moses Harding