India currency market: Validation of Rupee resilience to USD strength against global currencies

Rupee steady against USD and strong against others

It is credit to Raghuram Rajan for efficient management of USD/INR with intent to squeeze the trading band to restrict price volatility to cut damage on the hedging community - investors, lenders, borrowers, importers and exporters. Post Rajan taking command at RBI, the trading range has been squeezed from 68.85-58.33 (August 2013 to May 2014) to 60.20-63.89 (September 2014 to December 2014) to 61.29 to 63.00 (January to March 2015). In the meanwhile, EUR/INR collapsed from August 2013 high of 92.00 to 65.75 by March 2015. It is to the delight of all stake holders that Rupee has emerged as the strongest currency of the World. But for the gracious support extended to the USD by RBI, Rupee would have gained against the USD despite DXY rally from 78.90 to over 100 since May 2014. Bullish momentum in equity and bond market against stable (to firm) exchange rate is to the delight of off-shore investors.

It is all to do with strong external appetite for India assets and lead-lag impact from hedging community. The combination of demand-supply dynamics from cash and forward market leading to excess supply of US dollar over demand means RBI stepping in to provide equilibrium absorbing the excess $ supply. This is evident from build-up of $ reserves to $340 billion and on the flip side, helped to prevent Rupee weakness on sudden negative development or meeting bulky dollar demand. The presence on both sides has established Rupee stability at 61-63 to the comfort of all stakeholders. Our strategy to stay dynamic (and fleet-footed) playing end-to-end swings have paid dividends, buying short term dollars at forward value below 62.00 and to sell 12M dollars at 67.50-68.00.

Most cues continue to stay in Rupee favour despite bullish outlook on the dollar

The cues in support of Rupee are from comfortable CAD (stability in Brent Crude at $45-65 and weak Gold at $1000-1250), more than desired off-shore inflows (chasing India opportunities built over solid macroeconomic fundamentals), increased appetite for unhedged USD debt (to take advantage of carry-trade against currency stability), solid NRI inflows (higher allocation for India investments) and last but not the least, the evolution of Make-in-India story to build sustainable scale in India exports. All combined, it looks great for Rupee going forward.

Should the administered USD/INR trading band be restricted at 61-63?

There are signs of squeeze in the trading band at 62-63, with RBI presence at both ends. The squeeze is necessitated to build reserves before FED turns hawkish through start of rate-hike. This fear has made RBI to buy at any level between 62.20-62.70, thus preventing extended USD weakness to 61.00-61.50. This stance has proved good as RBI has also prevented Rupee weakness beyond 63 into 64.00. This management may continue to stay operative till clarity on the timing of 1st rate-hike from FED, expected to be at some point between June-December 2015. Till such time, USD/INR is expected to be in back-and-forth mode at 62-63 and in the absence of RBI, bias is neutral between 61 and 64.

Given the mixed cues in the short term, retain hedging strategy as before; now tracking end Apr'15 $ at 62.35/62.50-63.20/63.35; 3M $ at 63-64 and 12M $ at 66.50-67.50, break-out either-way is tough to sustain. This strategy will establish spot stability at 61.85/62.00-62.85/63.00, and would send panic signals on break-out either-way. Arun Jaitley has made his point clear and loud that exchange rate stability within a broad range of 58/60-63/65 is OK given the neutral impact between inflation and exports; at lower end benefiting from lower landed cost of imports and at higher end supporting the exporters and investors. While RBI may not be in disagreement with this view (and approach), it may release firm grip when desirable reserves are built and shift of system liquidity from deficit to surplus. This stance of wider band may be to the delight of traders, but would be at risk to hedging community to put in place risk management strategies balancing greed and prudence. So, stakeholders may need to tighten their belts, not taking the Rupee exchange rate for granted.

EUR/INR played to the script retaining near/short term stability against medium/long term weakness

The EUR/INR bearish chase began along with DXY bullish outlook from 80-85 to 100. The zoom-in pre and post FOMC chase began at 71.00-71.25 for pre FOMC exit at 65.75-66.00 for post FOMC recovery to 69.00-69.25 before down. To the script, saw push down from 71.18 to 65.75, followed by recovery to 69.25 before down to intermediate support zone at 67.50-68.00. What next?

Most (if not all) cues stay in support of USD, not withstanding QE driven positive economic data from major economies of the Euro zone. As FED prepares for rate hike in second half of 2015 against extended QE/NIRP by ECB through 2016-2017, and resultant interest rate advantage in favour of the USD retain long term bullish undertone. Economic advantage is also with the US against Euro Zone low growth - deflation dynamics. The only positive factor is the fear of concerted Central Banks intervention to protect major and emerging markets currencies against sharp decline. Till that situation arises, EUR/USD is seen locked at 1.0450/1.05-1.1050/1.12 in back-and-forth mode. If seen against consolidation in USD/INR at 62-63, EUR/INR is expected to stay in sideways mode at 65.75/66-69/69.25.  It is important to stay hedged on medium/long term exports (at higher end and beyond) and be fleet-footed on near/short term exposures with back-and-forth play.

All taken, the volatility play will be between FED stance on rate-hike and intervention fears of Central Banks. It is important to have close track on economic data print and feel of the pulse of Central Banks.

Moses Harding

India Equity market: Is euphoria being replaced by suspicion on the way forward?

Enviable score card of Raghuram Rajan and Narendra Modi

Indian equity market shifted into top gears since RR taking charge at the RBI. The results are there to speak; evident from the start of euphoric rally since August 2013. NIFTY is up by 66% (from 5471 to 9119) and Bank NIFTY up by whopping 150% (from 8366 to 20907), given RBI's direct responsibility over the banking system. NaMo impact was felt immediately after announcement of elections in February 2014. There were signs of INC giving up the fight, leaving the stage to NaMo led BJP. The end result exceeded expectation, giving clear majority to BJP in the Lok Sabha. The rally since February 2014 was at faster pace, thanks to NaMo factor; NIFTY up by 53.7% (from 5933) and Bank NIFTY up by 110%). It is indeed tremendous wealth creation for Corporate India and (domestic and foreign) investor community! Are we in for more?

Luck complementing the hope and optimism on Rajan and Modi

Supporting the domestic hope and optimism are the luck factors from external environment. The biggest trigger was the sharp decline in imported items, which constitute more than 50% of India imports. Lots have been discussed on the beneficial impact from sharp decline in Brent Crude from $115 to $45 and fall in Gold price from $1433 to $1135 during this period since August 2013. These favourable price movements put behind the worries on Current Account Deficit, Inflation and subsidisation of fuel cost, all leading to significant improvement in Fiscal Deficit. Rajan did an excellent job in exchange and interest rate management, which not only pulls-in external appetite, but also provides significant cost advantage for Indian companies to access off-shore markets for funds, thus diluting the pressure on domestic liquidity. Rupee recovery from 68.85 to 58.33 followed by stability at 60/61-63/64 is boon to foreign investors and domestic importers & foreign currency borrowers. Rajan also cut the volatility in interest rates to control the spike in 10Y Gilt yield from above 7% to over 9%; since then, it has been steady recovery below 8% for stability at 7.60-7.85%. More importantly, Rupee emerged as the strongest currency; despite sustained bullish momentum on DXY from 79-84 to over 100 during this period, Rupee withstood the strong headwinds with rock-solid stability, thanks again to Rajan for handling this with exhibition of confidence and physical intervention, both ways. All taken, global investors have stood to gain a lot during this dream run since August 2013. No surprise that the risk of sovereign rating downgrade in 2013 has turned to expectation of reward through upgrade in 2015.

Optimism in tact, euphoria at peak lead to profit-booking

The sharp reversal in March 2015, post the surprise delivery of 25 bps rate-cut on 4th March has shocked many, if not all! While the correction is in order given the reality that valuation from here shall be shallow (on huge lift of base), the 10% fall in 3 weeks caught many on the wrong foot. In the short term time frame, it is not good to see the 3 month valuation build-up getting unwound in 3 weeks; but, taking medium/long term time frame (from August 2013 - February 2014 to present), it is not very alarming. The cry is largely from short term traders, and not from long term investors!

There is nothing to dilute India optimism when external stakeholders are positive, giving time to build scale over the set firm base. India macroeconomic fundamentals is seen in evolution stage to be one of the best in view. The set FY16-FY19 targets on GDP growth at 8-10%, Inflation at 4-6%, Fiscal Deficit at 3-4% and CAD at 0.5-1.5% is to the delight of external investors, lenders and rating agencies. The global manufacturing enterprises see India opportunities to build scale on their balance sheet against growth depression in developed economies and emerging markets. India balance sheet has huge upside potential given the expanded geographical coverage, huge consumption population against job & wealth creation and enhanced focus on infrastructure to build linkages for expansion in manufacturing and agriculture sectors. The inclusive social agenda will squeeze the bottom of the pyramid to put monies in their hands for consumption and savings.

There is nothing to worry from FED shift from neutral to hawkish monetary policy stance, when other major economies (Euro zone, Japan and China) are expected to stay in extended ultra-dovish monetary policy stance through 2016-2017. The price valuation has already adjusted to this fear, but nothing to panic beyond here. The dilution in growth-inflation conflicts and twin-deficits not at risk on exchange and interest rate, there are no reasons to doubt monetary dynamics turning growth supportive. It is a matter of time for shift of domestic liquidity from deficit to surplus, thus shifting the operating policy rate from Repo to Reverse Repo rate.

Correction although swift, it is good for base adjustment for next round of valuation build

NIFTY at 9000-9150 and Bank NIFTY at 20650-21000 was seen as "hot-to-hold" zone for correction to "cheap-to-acquire" zone of 8450-8600 and 18250-18750. The set hot-to-hold zone turned out to be too hot despite 4th March rate-cut, pulling the need to review and set "fair-value" zone in NIFTY at 8200-8300 and Bank NIFTY at 17500-17750, allowing maximum correction of 10% in NIFTY (from all-time peak of 9119) and 15% correction in Bank NIFTY (from all-time high of 20907). While Bank NIFTY has given up intra-2015 rally (into striking distance of mid-Dec'14 low of 17502), NIFTY held below 2014 close of 8282 not far away from intra-2015 low of 8065 and mid-Dec'14 low of 7961.

NIFTY did recover from 8269 for close at 8341 (so is Bank NIFTY from 17719 with close at 18044), but there is no confidence as yet whether the set fair-value zone of 8200-8300 and 17500-17750 can withstand current bearish momentum? Is the recovery already in process or in sell-on-recovery mode searching for cheap-to-acquire zone, now seen at 7965-8065 in NIFTY and 16350-16500 in Bank NIFTY. The relief is that there has been dilution in sentiment from bearish to neutral at set fair-value zone, but comfort and confidence for shift to bullish undertone is in doubt. The trigger for this shift would emerge from passage of Land Reforms bill and bringing life to infrastructure sector. The investor (and lender) appetite is positive; concerns are from delay in shift from risk-off to risk-on. There is plenty of domestic liquidity (invested in risk-off Gilts and non-financial assets) and huge pipe-line external liquidity. The reduction in cost of capital (equity and debt) is work-in-progress.

NIFTY has minor resistant ahead at 8390-8405 and 8450; beyond here, will cut the bearish momentum for risk-neutral recovery into 8625-8800/8850. At this stage on shift into FY16, there are no major cues to look for extended correction below 8269 into 8210-8235, seen as make-or-break point to prevent overshoot to 7965-8065 (cheap-to-acquire zone). It is prudent to stay risk-neutral at 8200/8275-8550/8625 and await clarity in April to set up the bullish tone for 8850-9150.

Bank NIFTY recovery from 17500-17750 is impressive, relative to NIFTY. It twice failed below 17750 (at 17729 and 17719) for close at 18044; minor resistance zone ahead is 18350-18500 with set up of bullish momentum over 18750 for 19350-19500, while risk below 17500-17750 may find solid support at 16350-16500, seen as cheap-to-acquire zone. If all goes well, Bank NIFTY will be the lead engine to pull other sectors.

All taken, while traders may stay worried on lack of clarity on sustainable directional bias, long term investors who are staying put since August 2013 - May 2014 have no reasons to get panic and can see this steep correction to increase book size. For those who missed the euphoric rally since August 2013, it is dream-come-true opportunity to build book at set fair-value and cheap-to-acquire zones for revisit of set all-time high, and into bullish extended phase if confidence on fiscal prudence is established beyond doubt. To this effect, Arun Jaitley should deliver FY15 Fiscal Deficit at 3.9-4.1% and revise FY16 BE at 3.6-3.9%. This will result in shift of Repo rate from 7.5 to 7.0% (and thereafter shift of operating policy rate from Repo to Reverse Repo rate) and to demand sovereign rating upgrade from global rating agencies. In the meanwhile, external cues will not turn destructive, at worst turn from supportive to neutral. It is visible that strong domestic tailwinds will have the power to defuse impact from minor external headwinds.

It is not the time to turn negative on India; take comfort from the collective wisdom, ability and desire of Narendra Modi, Arun Jaitley and Raghuram Rajan to turn around Indian economy into a sustainable growth engine to the benefit of Indian people and financial markets. It is the time for investors (and lenders) community to put money to work on risk-on assets for better reward. The perception on risk adjusted return on India assets has turned from negative to neutral and it is evolving to turn positive for sustainable period from FY16-FY19 and beyond!

Moses Harding

Global markets: Review of Q1/2015 and outlook on way forward

Global cues dominated by accommodative monetary stance:

Global financial markets sentiment (and appetite) was mixed between risk-on and risk-neutral mode. While ECB/BOJ/BOC (and other economies in growth-inflation conflicts, growth depression against deflation fears) kept the tone positive with liquidity overdose at zero (and negative) Interest rate, expectation was mixed on FED monetary stance. There was pent-up fear of FED start of rate-hike cycle by June 2015, thus diluting the bullish momentum on risk-on assets for consolidation play, but at diluted bearish undertone. MARKET PULSE didn't see the need for FED to start the rate-hike cycle soon, given the growth-inflation dynamics being not in favour, and may not be effective for transmission. The expectation, therefore was to be in wait-and-watch mode, without giving any clear signal on the timing. The market outlook was based on the expectation of possible rate-hike in the second half of June 2015 to June 2016 period, with low probability of hike in 2015! All taken, the markets behaviour (and outlook) was tuned for bullish consolidation, with buy-dips strategy.

The trading strategy on DJIA index is to be in the chase from 17000-17150 for 18350-18500 (saw pick-up from 17037 to 18288 before consolidation above intermediate support zone of 17500-17650). US 10Y Treasury yield was expected to be volatile between 1.50/1.65-2.45/2.60%, tossed up between expectation swing of rate-hike fear against hope for extended pause (saw end-to-end of this range before consolidation at intermediate zone of 1.80-2.05%). It was bulls-eye hit on DXY, the bullish chase which began from 85 (since October 2014) was kept alive for 100, for end of chase (since then, got the rally from 84.47 to 100.39 before post FOMC consolidation play at 95-100). Brent Crude was expected to find support at $45-47 post the crash from $115, mainly on valuation risk from demand-supply (and price) equilibrium. The outlook, therefore was for gradual recovery from 45-47 not beyond 63-65 (saw bullish pick-up from 45.19 to 63.00 before consolidation at intermediate zone of 52-57). Gold recovery from set support (and short-squeeze) zone of 1120-1135 (seen in early November 2014) was expected to lose glitter at 1285-1310 for revert back to 1135-1150 before stability (saw the reversal from 1306.20 to 1142.86 before consolidation at 1150-1200). All taken, markets behaviour in Q1/2015 are more or less to the script. What next?

Global cues mixed between neutral to bullish undertone for Q2/2015:

Given the liquidity (and interest rate) support from major Central Banks extending into 2016 against FED pause on interest rate through 2015, risk-on assets stand to gain in the short term against currency stability. The tone, therefore will stay positive to be in buy-dips mode, without getting into one-way extended bullish phase. The market will throw up good opportunity for traders and may not be seen good for long term strategic investors. The need is to be dynamic (and fleet-footed), and avoid being in buy-only mode.

DJIA index is seen good to extend bullish momentum beyond 18288 for new high closer to 19000 with targets at 18600-18750 ahead of 18900-19000; risk-neutral support seen firm at 17650 (intermediate support at 17900-18000) to stay in chase for 19000.

US 10Y bond is expected to stay in sideways mode at 1.80-2.05% ahead of April FOMC, which may go non-event with no significant change of tone in the guidance. The volatility will be data driven against the trend in growth, inflation and unemployment rate. At this stage, there are no major cues in play to trigger break-out either-way. The strategy is to play end-to-end without chasing overshoot either-way, which is tough to sustain.

Post the end of chase in DXY from 85 to 100, the outlook is for consolidation at 94/95-99/100. Given the eventual shift into rate-hike mode in the US, well ahead of consolidation phase in other developed economies, DXY retain its medium/long term bullish undertone. The short term bias is for consolidation in Q2/2015, not ruling out weakness below 94 into 90-92, seen as good "take" for beyond short term play. The one-way up move in 2015 from 90.24 is seen to be over at 100.39 for Q2/2015. The post FOMC low of 96.50-96.65 is now at risk for extension into 94-95.50 while 98.50-99.50 stay heavy. It is good to absorb corrective rally into 98.50-100 (stop at 100.50) for target at 94-95.50.

EUR/USD is beaten down by over 13.5% in Q1/2015 (from 1.2097 to 1.0456 before post FOMC recovery to 1.1031). MARKET PULSE urged to close short-Euro book at/below 1.05 allowing post FOMC consolidation at 1.05/1.0750-1.10/1.1250. Since then, push-back from 1.1031 held around 1.06 for recovery into 1.0850-1.09. It is breather (and mark) time for Euro for extended recovery beyond 1.1031 into 1.1250-1.1300 and 1.1500-1.1550 before reversal into 1.0450-1.06. The signal for recovery will be under test at 1.0900-1.1050; failure here will get the focus back into 1.0450-1.06. All taken, visibility into EUR/USD parity is low and has moved out of focus in the short term.

USD/JPY has unwound intra-2015 rally from 119.68 to 122.02 before post FOMC push-back to 119.38. MARKET PULSE urged to close the bull chase from support/buy zone of 115-116.50 (low at 115.82) at 121.85-122.00 (high at 122.02). The short term tone is weak below 118.50-119.00 (minor support) for revisit to 115-116 which should hold to retain medium/long term bullish undertone beyond 124.00-124.25 into 135. Till then, 121-122 is seen heavy for 115-116.

Brent Crude retain strategic focus at 45/47-63/75 with neutral bias on break-out. In the near term, there is no clarity on the directional bias beyond 50/52-58/60 with most play at intermediate zone of 54-56. Need to be fleet-footed retaining big-picture focus at 45/47-63/65 with tight stop (on break-out) for low risk - high reward play.

Gold retain strong support at 1135-1150 and looks good for extended recovery beyond 1180-1185 with major resistance at 1220-1245 which should hold. For now, retain focus at 1145/1160-1225/1240 and play end-to-end. While short term outlook is for consolidation in neutral mode, medium term outlook is weak beyond set strategic support zone of 1110-1135.

Domestic cues mixed between euphoria and valuation worries

India got the best of everything since mid December 2014, with pent-up momentum into 2015. The external appetite was in plenty for India assets and domestic euphoria was at its peak. On the domestic front, there is nothing against with all cues in favour. Macroeconomic fundamentals are getting good with set up of firm base for shift to better and best by March 2019, ahead of next general elections. The other major bullish trigger was from shift in RBI monetary policy stance from suspect to accommodative, with 2 rounds of 25 bps rate-cut in quick time. The issue, however was the stretched valuation, post the intra-2015 break-neck rally; mistake of playing the test match like T20 for end of test match in less than 2 days!

NIFTY posted a swift 10% rally from 2014 close from 8282 to 9119 (intra-2015 by 13% from 8065 in less than 2 months). The reversal from 9119 to 8553 is at much faster pace to unwind most of intra -2015 gains. Ahead of Budget 2015, MARKET PULSE considered 8450-8600 as cheap-to-acquire zone and 9000-9150 as hot-to-hold zone for strategic play; since then, saw the bullish pick-up from 8470 to 9119 followed by sharp unwind to 8553, back to starting point.

BANK NIFTY is the worst hit, giving up 11.5% gain from 2014 close of 18736 to 28/1/15 high of 20907 and now at 18606, below the 2014 close. While the rate-cut brought in cheer, valuation mismatch against earnings pressure caused the damage, cutting the irrational exuberance in quick time.

While equity assets were volatile, 10Y bond posted gradual appreciation from 8.0% to 7.60-7.65% (strategic support and long-unwind zone) before stability at 7.70-7.80% MARKET PULSE ended the bullish chase from 8.40-8.65% at 7.60-7.65% for reinstate at 7.80% to be in chase for more.

USD/INR is seen as the best currency pair with limited volatility. Rupee has emerged as the strongest currency despite RBI support to the $ to arrest Rupee over valuation. RBI also comes to the rescue of Rupee, when in need to administer price-stability by its presence both sides. Rupee has remained strong with intra-2015 volatility limited at 63.62 to 61.29 to 63.00 to 62.36 to current 62.45 against 2014 close of 63.03. It has been good for hedge play (to hedge short term liabilities at spot below 61.50 and cover long term assets when spot above 62.50 enjoying the time decay) and carry benefit for FIIs and FC borrowers.

What next? Global cues in favour in the short term and domestic cues positive in the long term

NIFTY focus is retained between cheap-to-acquire zone of 8450-8600 and hot-to-hold zone of 9000-9150 (between 8470-9120). The strategy is to buy at 8470-8570 (seen low at 8553) with stop below 8450. There are several speed-breakers on the way at 8685-8700, 8785-8800, 8835-8850, 8985-9000 and 9120, tough nut to crack in Q2/2015. While do not see major risks in play to go below 8450, positive triggers may emerge for bullish break-out over 9120, but not beyond 9350-9500. I wouldn't be surprised to see 25-50 bps rate-cut from RBI and sovereign rating upgrade before FED preparedness for shift into rate-hike cycle.

BANK NIFTY strategic buy-zone is set at 18250-18750 (seen low at 18541); see no cues to trigger downside break below 18250-18500. There are firm resistance zones at 19350-19400, 19550-19600, 20000-20100 and intra-2015 high at 20907 to stay safe in 2015. All cues (current and evolving) taken, strategic focus retained at 18250/18600-20650/21000 for Q2/2015 and may be for rest of 2015.

Rupee retain its short/medium/long term bullish momentum adjusted for time decay at 0-3% against 1Y FX premium of 7.0-7.5%. The recovery from 62.95 has target at 61.95-62.20 ahead of 61.20-61.70. The hedge strategy is to buy 1-3M $ 62.00-62.50 (forward rate) and sell 12M $ at 67.35-67.85. This strategy has remained unchanged, and has given enough opportunities for strategic traders for back-and-forth play.

All taken, Q2/2015 (and start of FY16) will be period of consolidation. There will be lot of positive triggers from domestic cues, while external cues stay supportive in the short term.

Good luck, and wish you stay prudent and sensible avoiding irrational exuberance!

Moses Harding

Post FOMC Currency market outlook

USD retain bullish consolidation undertone against major currencies:

DXY reversal from pre-FOMC high of 100.39 almost met set post-FOMC target at 95.00-96.50 (with low at 96.63). The strategy to close the $ bull-chase from 80-85 at/above 100.00 has worked well. What next? Not withstanding the dovish (and accommodative) monetary policy stance by the FOMC, there are no signs of significant unwind of $ gains. The short term trading range is seen not beyond 95/96.50-99/100 with most trades in the inner-ring. The strategy is to play end-to-end and reinstate strategic "long-dollar" book at/below 95.00 for revisit over 100.

EUR/USD recovery from pre-FOMC low of 1.0456 almost met post-FOMC target at 1.10 (high at 1.0991). The strategy to close short-Euro chase from 1.25-1.26 (since mid Dec'14) at/below 1.05 has worked well. What next? Given the interest rate play (and macroeconomic fundamentals) strongly in favour of the US, Euro zone (and its currency) will stay under pressure through 2015-2016. This outlook sets up strong long term strategic resistance at 1.10-1.12 for revisit of 1.0450-1.05 in the short term, before getting better visibility at 1.0-1.0250, with near term intermediate support zone at 1.0575-1.0725. The strategic focus, therefore is to stay in back-and-forth mode at 1.0575/1.0725-1.0975/1.1125, and to build strategic short-Euro book for revisit to 1.0450-1.05 en route to 1.0-1.0250.

GBP/USD traded end-to-end of set strategic focus range of 1.45/1.4650-1.50/1.5150 for swift intra-day pre-FOMC low of 1.4632 to post-FOMC high of 1.5147. What next? Here again, see firm strategic resistance at 1.5150-1.5300 for revisit to 1.4500-1.4650 with intermediate support zone at 1.4750-1.4900. The strategy is to play end-to-end of 1.4750-1.5150 in the near term, and to build strategic short-GBP for short term target at 1.45-1.4650 en route to 1.42-1.4350.

USD/JPY push-back from pre-FOMC high of 121.85-122 (high at 122.02) found support at post-FOMC target of 118.50-119.50 (low at 119.38). Retain set strategic focus at 118.50/119.50-121.50/122.00, and prepare steam for extended bull-run into 123.50-125 in the short term.

Rupee retains its strongest global currency status with most (if not all) cues in support:

USD/INR rally from 61.65 (post rate-cut and swift DXY rally from 94.00-95.50 to over 100) failed at set resistance at 62.85-63.00 (high at 62.9950). The strategy was to sell 12M $ at 67.35-67.85 (high at 67.57) and cover end Mar'15 exports at 63.10-63.35 (high at 63.25) for post-FOMC spot target at 62.35, which is now met. What next? Both domestic and external cues are in favour of Rupee to keep net flows in $ supply driven mode, keeping RBI busy absorbing excess $ supplies to maintain demand-supply equilibrium for gradual Rupee appreciation with immediate target at 61.95 en route to 61.50-61.65. Any correction (from short dollar squeeze) will be shallow at 62.50-62.70. The hedging strategy may be in traction with 12M $ at 66.10/66.35-67.10/67.35 and 3M $ at 62.75/63-63.75/64.00. For now (into crucial 7th April monetary policy review), would prefer sideways mode at 61.95/62.20-62.45/62.70 with Rupee bullish extension limited at 61.50-61.65.

EUR/INR traded to the script for chase from 71.00-71.25 to 65.75-66.00; thereafter expected correction/recovery failed at 67.75-68.00. The currency pair is under severe pressure both from bearish momentum on EUR/USD and USD/INR. It is good to retain short term focus at 65.75/66.00-67.75/68.00 for sideways play; beyond there, bearish momentum is strong for extended weakness into 63.00-64.50.

Moses Harding

Post FOMC markets expectation

Three probable outcome from FOMC

1. Hawkish guidance signalling start of rate-hike cycle in June-September 2015 (leading to weak equity & bonds and strong dollar)

2. Dovish guidance deferring the rate hike to beyond 2015 (leading to strong equity, firm bonds and weak dollar)

3. Neutral stance being cautiously patient in wait-and-watch mode looking for better clarity on growth, inflation and unemployment rate (leading to stability at current levels with mild bullish undertone on equity & bonds and consolidation on the dollar).

Impact on India markets:

See NIFTY at 8470-8620 (on hawkish tone); 8850-9000/9120 (on dovish stance) and consolidation at 8620-8850 (on neutral stance).

USD/INR extreme scenarios are at 63.00-63.50 (on hawkish stance); 61.50-62.00 (on dovish stance) and consolidation at 62-63 (on neutral stance)

EUR/INR extreme scenarios are at 63.50-64.50 (on hawkish stance against EUR/USD at 1.0-1.0250); at 68.00-69.00 (on dovish stance against EUR/USD at 1.10-1.1250) and consolidation at 66-67 (on neutral stance with EUR/USD at 1.05-1.0750).

10Y bond may not have much traction with whatever outcome from FOMC, with most domestic (and external) cues in favour of inflation and twin-deficits for consolidation not beyond 7.60/7.65-7.80/7.85%.

Fingers crossed, and may not be surprised if FOMC turn out to be non (and irrelevant) event!

Moses Harding

Land, Labour and Legal reforms critical to retain India euphoria

Need to place national interest ahead of self

India is known for sacrifice (and compromise) for national interest. Indians have sacrificed wealth (and self) for national well-being, since pre-independence years. Then, why such stiff resistance to reforms that would take India forward to greater heights? Is the Indian politics happy with where India is today? It is high time, India needs political reforms (and maturity) to put the nation ahead of the interests of self and party; post the elections, it is sensible for all parties to come together with the common agenda of nation building. When we open up India to the developed world, why not import political maturity from them?

Land reforms critical for infrastructure build

India needs land to build international standard roads, rail, ports, power, telecom, water, SEZs etc to build robust infrastructure to spur growth in manufacturing and agriculture sectors. India also needs labour reforms for building India growth story at sustainable 10% year-on-year. The top-up is the legal reforms to provide comfort to investors (and lenders) to put more monies to work for productive investments, which is critical to generate employment and wealth. All these will lead to significant upgrade in social well-being and prosperity.

Need to have fair play in acquisition

Any acquisition is based on fair value, acceptable both to the giver and acquirer. And, anything is available for a price based on the need (and urgency) of the buyer or seller. In the current context, India (not the Government) is the buyer with urgent need, and the seller (who owns the land) gets double benefit, from sale value and direct benefits from India well-being. Many countries (developed and emerging) have demonstrated this for the ultimate benefits for the people. The belief now is that Land is acquired for the benefit of corporate business houses, and not for India. The Government has the duty to kill this myth in the bud to bring all political parties in loop for this common objective.

Infrastructure need is huge; Land reforms is only a beginning

India plans to build 30KMs of road per day across 2/4/6/8 lanes to build connectivity across India for smooth movement of goods, services and people. It is long term cost (and time) efficient. This vision can not be realised without availability of land, not held by the Government. If more than adequate compensation is put on the table ensuring that livelihood is not put at risk, land owners will be more than willing to support the Government. Extend this to other economic and social infrastructure, the need is huge and so is the opportunity for monetisation of land which may not be remunerative for the holder. Compensation can also be in the form of cash and structured equity to provide monthly or yearly dividend. Land acquisition process can be smooth with this combination, and will be win-win for both.

Euphoria build over political stability to push reforms is at danger

Stake-holders built re-rating of India (and its financial markets) based on hope (from domestic optimism) and luck (from external factors, over which "powers that be" has no control). The beneficial impact from external luck factors is now behind, and lot is expected from realisation of hope from domestic actions, measures and execution. There is lot at stake for India; reforms across land, labour and legal can pull-in Trillions of investments to spur consumption. The beneficial impact from combination of investment and consumption "push" will bring in significant capacity expansion for job and wealth creation, not only to make India the best place to do business but also to upgrade standard of living for peaceful coexistence. All sounds very good, but the trigger is with the political parties to have common agenda of "nation building"; will they? It is now or never!

Let good sense prevail!

Moses Harding

RBI endorsement on the Budget 2015 is step in the right direction

RBI rate-cut not a surprise and well-timed to arrest euphoria dilution

Market Pulse asked for 25 bps rate-cut ahead of Holi festival and RBI obliged, seeing merit in the demand! While the rate-cut (before 7th April policy review date) was surprise to many, what is more intriguing is the post-action sell off across  asset classes despite being a pleasant surprise! I would consider the rate-cut as best-timed, as prevention act rather than cure, and as an exhibit to all stakeholders that the Government and RBI stay in the same pitch (and wave length) to work on fiscal & monetary dynamics to stay stimulus to growth, diluting growth-inflation conflicts. There is lot of noise around Budget'15 not meeting the FY16 fiscal deficit target of 3.6%; higher estimate at 3.9% against aggressive growth target of 8.1-8.6% is seen as major risk in play. This worry, along with tight money (and liquidity) conditions in March was putting pressure on markets; rate-cut came in to arrest sharp push-back, and to extend stability in financial markets ahead of end FY15. But for this rate-cut, NIFTY would have already gone weak below 8450, Rupee into 63 and 10Y bond yield over 7.85%. Thank you for the good thinking, Governor Rajan. The positive take-away is the emergence of common agenda (between the FM and RBI) to manage growth-inflation dynamics to enable monetary policy to stay supportive to consumption and investment.

Global cues stay supportive to India optimism

Global markets have already shifted from risk-off to risk-on mode driven by liquidity over-hang, near zero returns for extended period on risk-off assets and signs of improvements in growth against comfort on ease in disinflationary pressure. DJIA has already shifted base from 16850-17000 to 17500-17650 (with resistance now at 18350/18500), pushing the US 10Y yield up from 1.50-1.65% to over 2.15% (on risk of FED start of rate-hike cycle from June-September 2015), and diluting investor appetite on Gold with push-back from $1285-1310 to 1160-1185. Brent recovery from $45-46 into $63-65 is also looked positive and win-win for all. While strong favourable interest rate play pushed $ higher (DXY from 80 into 97.50-100), impact on emerging markets currencies has not turned spoilsport with minimal impact on the Indian Rupee. All taken, existing supportive global tailwinds is there to stay in steady mode, awaiting FED stance on interest rate moves.

India medium term outlook stays positive with minor concerns in the short term

Both Railway & Union Budget 2015 has set up road map for FY16-FY19 and if the set targets are achieved, it would lead to second term for Narendra Modi for extended term for 2019-2024 and beyond; so, it is a "survive-or-perish" period for Modi Government. This sets up strong intent (and personal agenda) to exceed expectations, hence there is no doubt whatsoever on the all out efforts that would be put to achieve targets. It would be survival of the fittest period for the team members of Modi. The FY16 agenda on BFSI and infrastructure sectors is step in the right direction. This will set up strong base to script the "Make-in (for)-India" agenda to scale up capacity on manufacturing and agriculture sectors. All these will lead to fiscal prudence giving deep pockets to spend for social well-being. The strategy is commendable and looks great on paper, and building tactical solutions is work-in-progress; concerns remain on execution capabilities and if these doubts are removed in FY16, it will be a great bull ride into FY17-FY19 and beyond!

India equity market in bullish consolidation mode

NIFTY has been in roller-coaster ride between 8450 to 9150 since 30th January with 8996 to 8470 to 8913 to 8669 to 9119 before close around mid-point of set post-Budget trading range of 8700/8750-9150/9200. The major comfort is from lift of long term strategic base to 8650-8750 with firm resistance now at 9150-9250. If the 12 month re-rating (of over 50%) since February 2014 from 5900 to current (8900) is carried through FY16 with another 10-12% top-up into 9800-10000, it would be good job done! For this, steady improvement in macroeconomic fundamentals need to become visible to stay in comfort to avoid trigger of profit-booking. There will be good appetite from domestic investors given limited upside in Fixed Income assets, while foreign monies continue to chase mix of valuation gains (in equity and bonds) and "carry" advantage from Rupee stability. For now, retain strategic buy zone at 8700-8750 (risk only below 8650-8700 for 8450 before strongly up), but not yet sure of sustainability beyond 9150-9250. FED and Global rating agencies hold the trigger for back into bullish rhythm beyond 9150-9250.

Bank NIFTY has lead from the front with 100% re-rating since February 2014 from below 10000 to over 20000. It has been more volatile during the pre-budget 2015 to post rate-cut period with 20907 to 18226 to 19532 to 18489 to 20541 before stability at 19350/19450-19900/20000. The good thing is that volatility is limited at set strategic focus zone of 18200/18450-20450/20650. For now, see support at 19000-19150 with strong resistance at 20000-20150 ahead of 20500-20650 while the recent peak of 20907 expected to stay safe through FY16 with sideways mode at 18400/18650-20650/20900 in the short term till next round of rate-cut. Banks will be under earnings pressure in FY16 (to match high valuation) against limited upside on Investment portfolio, higher provisions and limited visibility on credit pick-up.

All taken, stakeholders need to see sustainable improvement to achieve (and surpass) set FY16 GDP growth target at 8.0-8.5% to provide comfort on fiscal deficit at 3.6-3.9%, while worries on inflation and CAD are behind. There is nothing to panic at this stage, and good to stay in back-and-forth mode in NIFTY at 8700-9200 and Bank NIFTY at 19000-21000.

India Bond market is good with limited upside

The beneficial impact of ahead-of-schedule rate-cut on 10Y bond is shift of focus from 7.75-7.85% to 7.60-7.75%, building for tenor premium over the overnight base rate of 7.5%. From here, the expectation is for another 25-50 bps rate-cut between June-December 2015 subject to achievement of growth-fiscal prudence conditions. While CPI stability around 5% can be taken as granted, issues revolve around fiscal prudence and FED monetary policy stance. Both these factors are seen as risk in play for rate pause till June 2015; beyond there, there is no clarity on either extended rate pause till end of 2015 or another 25-50 bps rate-cut. The worst case of steady Repo at 7.5% will guide stability in 10Y bond at 7.65-7.80% and best case scenario at 7.35-7.50% on shift of Repo rate to 7.0-7.25%. There are no cues in favour to expect shift of operating policy rate from Repo to Reverse Repo rate in FY16. The squeeze in the India-US 10Y yield spread at 5.50-5.60% is risk on India 10Y bond with firm resistance at 7.65-7.75% on US 10Y stability around 2.25% (for 7.65/7.75-7.85% consolidation).

The strategy ahead is straight forward; unwind 10Y benchmark 8.40% 2024 at 7.65-7.70% awaiting new 10Y bond in April with coupon at 7.55-7.65%. While strategic unwind happens at/below 7.70%, traders appetite will be seen at/above 7.80-7.85% for last-mile chase into 7.65% to guide stability at 7.70-7.85% till the new 10Y benchmark bond comes into play.

Rupee strong on time-decay adjusted basis

Rupee has been in back-and-forth play at 61.25/61.35-62.35/62.45; importers (and RBI) lend support for the $ at set lower end to cover near/short term imports at forward value below 61.85-62.35 and exporters (and carry-trade) appetite good at higher end to sell 12M $ at forward value at/above 66.85-67.00. This hedge strategy has helped to provide Rupee exchange rate stability with RBI in readiness to arrest excessive moves either-way.

What next? Most cues continue to stay supportive to Rupee; major risk is from strong $ (against global currencies) and comfort from robust off-shore flows and elevated FX premium. While most wish for REER linked Rupee depreciation (to support exports), demand-supply dynamics continue to be in favour of Rupee and RBI in $ buy-mode to provide equilibrium. Adjusting for part of time-decay, focus is now at 61.50/61.65-62.35/62.50 with unchanged hedging strategy; importers hedging near/short term $ payables at forward value of 62.00-62.50 and exporters covering medium/long term $ receivables while 12M at/above 67.00-67.15. All taken, USD/INR stability at 61/61.50-62.50/63 is win-win (and acceptable) to all stake-holders. At this stage squeeze in India-US rate differential is not seen as major risk on Rupee against the elevated 1-12M FX premium.

EUR/INR push-back from 71.00-71.25 has stretched beyond major support at 68.00-68.25 driving the EUR/USD from 1.1450-1.1550 into 1.07-1.10 against USD/INR pull-back from 61.55-61.70 to 62.35-62.50. With the kind of sharp fall from 80 to below 68 since mid December 2014 (in 3 months), prefer stability at 65-70 (against EUR/USD at 1.05-1.10 and USD/INR at 62-62.50/63); stay neutral on break-out bias, not ruling out concerted Central Banks intervention to prevent extended bull-run in #DXY beyond 97.50-100.

Moses Harding

Macroeconomic targets: Signs of "Achha din" ahead!

Efforts to build partnership between the Government and BFSI Regulators

In a democratic set-up, it is important for the financial regulators to be catalyst to Government's efforts to improve economic productivity (and efficiency) for uplift of social well-being (and to dilute inequalities). In this context, role of RBI, SEBI and IRDA are very critical, and should be seen walking together with the Finance Ministry (and the Government).

As elected representatives of the people, the Government is answerable, responsible and accountable to the vote bank; hence it is not unfair to allow the Government to set targets on macroeconomic fundamentals and the tolerance (or comfort) zone, which the regulators should work on. The agenda for the regulators is to frame such rules that would help to achieve equilibrium in demand-supply, growth-inflation, CAD/exchange rate - interest rate, consumption-investment etc to achieve the common agenda - economic value creation for social prosperity!

Aggressive targets, but not over ambitious

The set targets for FY16-FY19 looks great to carry India optimism into the next decade beyond May 2019, when Modi will submit his score card to the vote bank for extension for his 2nd term. The achievement of the set targets would obviously need joint efforts of the Government and the financial regulators to facilitate execution through aggressive out-of-the-box creative (and innovative) measures:

Targets through FY16-FY19:

GDP growth : 8.0-10.0%

Fiscal Deficit : 3.0-3.9%

CPI inflation : 4.0-6.0%

CAD : 0-1.5%

If these numbers trend into the right (and desirable) direction, then there is no stopping for India joining the elite super power group of countries.

What is expected from the RBI

RBI has now good comfort on the CPI (currently steady around mid-point of 4-6% comfort zone), but seen unsettled on upward revision in FY16 fiscal deficit budget estimate from 3.6 to 3.9% of GDP. There are reasons to acknowledge this stance as one-off and long term positive: (a) to adjust for previous years window-dress, it's one-time sacrifice without continuing with financial adjustments to achieve set target and (b) sacrifice on fiscal deficit for productive economic investment is seen as positive. RBI's concerns on Rupee exchange rate against squeeze in interest rate differential is not relevant now against expectation of long term stability in Brent Crude at $50-80 and CAD easing to historic low's, not ruling out turnaround into CAS if "Make-in-India" agenda drives exports.

RBI has major role to play to support the Government:

(a) Driving the operating policy (Repo) rate  into lower end of 7-8% tolerance zone maintaining spread of 2% between Repo and CPI rate to guide balance between investors-borrowers, consumption-investment, FII appetite-exit and stay competitive to pull-in long term inflows. If all goes well with CPI into 4%, there would be need to shift the operating policy rate from Repo to Reverse Repo rate maintaining system liquidity in surplus mode.

(b) It is an important agenda for RBI to divert liquidity from risk-off investments to core sectors that are starving for cash. It is also important to provide push-triggers while the business viability is work-in-progress till monies start chasing these opportunities. The push factors are from providing cost/yield advantage and inclusion of lending to these sectors as priority to economic growth. Government has shown the way through flagging infrastructure focus for FY16-FY19 as growth-investment-consumption drivers, and its time for RBI to give its weight in support.

Time for SEBI to activate capital markets as funding engine for growth

SEBI has done a lot in upgrading the financial infrastructure in the capital market through ensuring transparency, fair-play and building tight control mechanism around operations, risk management and compliance. While there is robust back end, it is time to focus on the front end business to bridge effective bond between investors and borrowers through development of robust primary and secondary markets. At this stage, capital market (equity and debt) are easily accessible to the top-end users (who are already chased by financial intermediaries). The flow of monies to core sectors and small & medium enterprises is insignificant.

SEBI has major role to play to broaden and deepen the capital market:

(a) There is need to create 3-tier platform retaining the existing coverage and to expand coverage for SMEs (to support manufacturing sector) and infrastructure sector (to release non-credit funding to revive existing projects and for capacity expansion).

(b) The existing product coverage are mostly plain-vanilla in nature; risk-reward is not equally distributed between the issuers and investors, risk being heavy on the investor with upside retained by investors. It is time to turn creative and innovative in pushing the issuers (and Asset Managers) to facilitate (and upgrade) product manufacturing skills for higher investor participation. The issue is not on availability of liquidity (both domestic and external), while the concerns are in channeling the money to where it is required. Lot is to be done as the first step to pull-in monies to infrastructure sector through IDF (debt focus) and AIF (equity focus).

Insurance companies to emerge as major funding engine to infrastructure growth

The liability profile of Insurance companies is the best fit for infrastructure funding to build matched maturing asset - liability profile. As of now, major portion of investments (of Insurance companies) flow into Gilts and AAA credit. This means that adequate monies are not made available to entities who are critical to building economic capacity and are deprived of availability of liquidity at affordable cost.

It is time for IRDA to review the investment strategy of Insurance companies to strike good balance between investors interest and economic opportunities. The need is to shift risk profile from conservative (low risk - low reward) to moderate, and make more liquidity available to infrastructure, manufacturing and agriculture sectors. It is essential for Insurance companies to provide leverage to Government investments, which in turn will set up momentum to private sector participation.

Growth visibility will improve if financial regulators turn as facilitation engines

The efforts to build partnership between Government and Regulators is step in the right direction. If all seen together in the same pitch (and right wave length), stakeholders sentiment (and confidence) will step up pace towards the set targets. Signs of "all is well"!

Moses Harding