What next in India Financial markets?

Roller-coaster ride in Equity market from end of FY15

MARKET PULSE end of FY15 strategy was to close equity investment book while Sensex above Mount 30K and NIFTY over 9K. The euphoria driven rally (since May 2014) largely driven by FPI investors was seen stretched, and staying invested over here was not backed by fundamentals (and valuation) support. The strategy, therefore was to take money off the table, ahead of bearish consolidation in H1/FY16. The outlook was to allow reversal into strategic base (and cheap2acquire) in NIFTY at 7950-8100 from hot2hold zone of 9000-9150. Bank NIFTY was seen to be extra stretched at 20650-21000 for reversal into strategic base at 17250-17600. The reversal from March'15 peak (NIFTY at 9119 and Bank NIFTY at 20907) established bearish consolidation in May'15 at lower-half of set strategic focus in NIFTY at 7950/8000-8500/8550 and in BNF at 17250/17400-18850/19000. Post the intra-May back-and-forth in NIFTY at 7997 to 8489 to 8270 to 8443 (close at 8433) and BNF at 17246 to 18755 to 18226 to 18751 (close at 18721), the undertone ahead of 2nd June monetary policy is neutral.

Domestic cues to set up directional bias, while global impact stay mixed and neutral

India Equity assets valuation priced-in most positive cues ahead, and the current bearish consolidation covers most of disappointment and dilution in euphoria. There is concern on FPI appetite from unwind of intra-2015 gains in India while other markets have done significantly better on exchange rate adjusted basis. All taken, combination of domestic and external cues do not suggest clarity on short term directional bias. MARKET PULSE outlook for rest of H1/FY16 (ahead of FED start of rate-hike cycle in Q4/2015) is mixed between neutral and bearish consolidation. The outlook now is for post policy bearish consolidation in NIFTY at 7950/8000-8500/8550 (BNF at 17250/17400-18850/19000) or shift into neutral consolidation at 8250/8300-8800/8850 (BNF at 18100/18250-19600/19750). RBI policy actions hold the trigger ahead; given the choice between 25 bps rate cut (with cautious guidance) and rate pause (with neutral wait-and-watch guidance), see post policy sideways mode in NIFTY at 8250/8285-8515/8550 and BNF at 18100/18200-18900/19000. Retain neutral bias on break-out in NIFTY within 7950/8000-8800/8850 and BNF at 17250/17400-19600/19750. Strategic investors continue to watch NIFTY at 8000 (BNF at 17250) as good entry point for revisit to 9000-9150 (and 20650-21000) in H2/FY16. Over all, retain NIFTY rest of 2015 big picture at 7950/8100-9000/9150, overshoot either way may not sustain for long.

India 10Y bond has limited upside potential in H1/FY16

The big play in India 10Y Gilt (8.40% 2024) rally from over 8.65% was done at below 7.65%. The new 10Y bench mark has since recovered from 7.72% coupon cut-off yield to 7.63-7.65%. Most cues ahead such as Repo rate stability at 7.25-7.50% in H1/FY16,  India-US 10Y yield spread base at 5.50%, Rupee pressure into 65-68 and excess of Gilts supply over demand will limit gains at 7.55-7.65% for push back into 7.80-7.90%. It is good for Banks to cut the duration of the SLR book through switch from longer end (10Y & beyond) to shorter end (up to 2 years). The post policy outlook on 10Y Gilt 7.72% 2025 is at 7.65-7.80%, overshoot not beyond 7.55-7.90%. The impact from US 10Y yield is mixed, which has been volatile at 1.85-2.35% and now steady around the mid point. While the impact from ease in 10Y below 2.10% will be limited, spike into 2.35% will be extended weakness here. All combined, it is high risk to stay "long" at 7.55-7.65% and stay in cash for good value entry at 7.80-7.90% for H2/FY16 consolidation at 7.50-7.65%.

Rupee under pressure from USD strength with RBI on the bid

USD/INR has already shifted short term strategic focus at 63.35/63.60-64.60/64.85, setting up firm base for end June'15 at 63.95-64.10 and 12M at 67.95-68.10. The bullish pick up from 61.65-62.15 base to 64.20-64.35 (end May'15 $ resistance at 64.35-64.50) was swift before RBI restoring spot stability at 63.45-63.95. What next? Rupee will continue to stay under administered pressure, building traction with DXY bullish momentum into 98.50-100 and RBI $ bids cutting the traction on DXY push back into 95-96.50. The combination of reduction in FPI flows, importer's lead against exporter's lag and the need to retain Rupee competitive for exports and FDI flows will retain bias into 64.60-64.85 (end June'15 $ focus range at 64-65). Retain hedging strategy at end June'15 $ at 63.95/64.10-64.85/65.00 and 12M USD/INR at 67.95/68.10-68.95/69.10.

EUR/INR impact neutral from weak Euro and Rupee pressure

EUR/INR reversal from 73.00-73.25 held at upper end of 68.50-69.50 before consolidation at 69.50-70.50. The outlook on EUR/USD is for near term consolidation at 1.07/1.0850-1.10/1.1150 and USD/INR at 63.45/63.70-64.60/64.85. This sets up consolidation play at 69/69.50-70.50/71.00 with neutral bias on break-out either way.

Good luck and have a great week ahead!

Moses Harding

Expectations from RBI monetary policy review: Mixed between cut or pause!

Comfort on the present but no confidence on the future

It is tough for RBI to defend "rate-pause" when CPI at sub 5% and twin-deficits in comfort zone. The system is also looking for significant reduction in cost of funds to improve earnings efficiency, and to bring down cost of capital to use (and expand) capacity. There is space for 50 bps rate cut going by the RBI formula of 1.75-2.0% spread between Repo rate and CPI print. What not clear is whether the formula to be applied on the current/past data or outlook on the future! Despite CPI trend into lower-half of 4-6% target zone, RBI is concerned on possible downside risks into 5.5-6.0% through rest of FY16. If such fear turns into reality, then RBI may need to push Repo rate to 7.5-8.0%. So, why cut rate now only to be moved up later? It may be better to pause to stay with the interest rate reduction cycle which began in January 2015. Makes sense!

Cost of capital (and liquidity) not seen as impediment to growth

System liquidity is in plenty and cost for good (and priority sector) credit is not high, while the opportunities to lend are few and investor confidence is euphoric but low. Credit growth in the last few years have been low, not withstanding the shift of credit from Bank to non-bank entities through CPs and Bonds (at cost 8-10%), leading to Banks holding huge excess SLR portfolio. The rate-sensitive sectors of Manufacturing, Automobiles, financial services etc have done well in FY15, clocking growth rate above 7.3% GDP growth. The laggards are mainly policy-sensitive sectors like agriculture, mining, infrastructure etc. When growth issues are from sectors which are not sensitive to interest rates and when RBI has little comfort on sustainability of CPI at 4/4.5-5%, the Governor will prefer not to act in haste and stay in pause till monsoon impact is felt on food prices. Brent Crude price impact is also not clear as the price has turned adverse from $45 to $70, against Rupee depreciation from 58 to 64. The downside risks of shift into $60-85 and 63-68 will be kept in mind.

Status-quo on liquidity

RBI may not see reasons to cut CRR when in aggressive $ buy mode. CRR cash would be needed for $ sterilisation to cover resultant Rupee infusion into the system. To compensate for this, there is case to reduce SLR from current 22% to 21%. Given that Banks are in excess SLR mode, cut of 0.5-1.0% will only result in arresting decline in medium/long term Gilt yields, and to maintain a flat yield curve across 1-10 years retaining neutral system liquidity.

50:50 probability between 25 bps rate cut and extended pause mode

RBI has already delivered 2 rounds of rate cut in Q1/2015, easing the Repo rate from 8.0% to 7.5% and administering overnight call money rate at 7.5-7.75%. RBI has already shifted into accommodative monetary policy stance and see no cues to turn into ultra-dovish stance as yet. There are opinions that RBI needs to follow other developed (and emerging) economies to stay easy on monetary policy through more rate cuts or shift of operating policy from Repo to Reverse Repo rate. But, those countries do not have issues around inflation and current account deficit. Currency depreciation resulting out of loose monetary policy will do more good than harm for those countries. But India economic dynamics are different, still not out of the woods on inflation and twin-deficits. So, there is case to stay in pause in Q2/2015 for assessment in Q3/2015 when there would be better clarity from FED on its rate hike cycle and resultant impact on Rupee and FPI flows. FPIs are not seen to be happy staying invested in India. The 2015 YTD performance on their India portfolio is negative both on asset valuation and exchange rate adjustment. US investors would have been better of staying with US and China, while Euro/UK zone investors would have got more through currency depreciation. RBI can't afford to have "run" on the Rupee, which will lead to liquidity squeeze and upward pressure on interest rates. All taken, it would be prudent to stay in pause while way ahead is not clear. When the choice is between devil and the deep sea, it is better to avoid both!

Outlook on macroeconomic fundamentals

RBI's FY16 GDP growth estimate at 7.8% may be retained. It is below Government's target of 8-8.5%. Given the FY15 base at 7.3%, it will be good if FY16 target of 7.8% is met. Given the upside potential from agriculture, natural resources and infrastructure, it is good to stay balanced on liquidity and rates till policy related impact is felt on the ground.

Given the downside risks from monsoon, Brent Crude and Rupee, RBI is expected to retain CPI target at 5.5-5.8%, not ruling out stability at 5.0-5.5% if risks do not turn into reality.

RBI is seen to have good comfort on twin-deficits. FY16 growth momentum into 7.8-8.0%, and plugging revenue leakages provide comfort on Fiscal Deficit trend down into lower end of 3.5-3.9% target. Current Account Deficit is also seen to stay in comfort at sub 2%, despite downside risks from higher Crude. The beneficial impact will be from FDI flows and Gold monetisation scheme.

All combined, interest rate impact on evolving macroeconomic dynamics is not significant, hence seen adequate. Beyond here, it may turn destructive causing more pain than gain!

What will Rajan deliver on 2nd June?

Option 1: Stay in pause through Q2/2015 for assessment in Q3/2015 post monsoon and FED stance. The guidance will be neutral and data dependent.

Option 2: Rate pause with 50 bps SLR cut, pushing Banks to shift appetite from risk-off Gilt investments to risk-on Credit portfolio. The guidance will be neutral and data dependent.

Option 3: Deliver 25 bps rate cut and 50 bps SLR cut, seen as balanced approach playing to the gallery (Government and borrowers) with zero impact on medium/long term yields (diluting impact on the investors). It will be good for marginal decline in the shorter end of the yield curve and marginal spike in the medium/long term curve at 7.5-7.75% across 1-10 years. The guidance will be neutral and data dependent.

Option 4: Deliver 25 bps rate cut, keeping SLR unchanged. The guidance will be hawkish with caution that rate can move either way ahead with data. It would mean that if CPI trends up into 5.5-6.0%, chance of Repo rate hike from 7.25 to 7.50-7.75% is not ruled out.

It is difficult to choose from the above 4 options. When it is tough, better to stay quiet till dust settles down! If I were the Governor, I will stay in pause in June 2015 till impact of Q1/2015 actions are felt! The cat will be out of the bag on 2nd June; in any event, impact on the markets will be neutral to bearish!

Moses Harding

Is India ready for full Capital Account Convertibility?

It is good time, but not yet the best time!

India is in the last lap of 25 years into economic liberalisation, which began in 1991 with intent to counter emerging FX crisis. Since then, partial convertibility has been allowed both sides; opening up inbound investments to FPIs, FDIs and other approved investors & lenders, while allowing restricted outbound investments to resident individuals & companies. Now, the talk of full convertibility has again emerged as India prepares for second phase of 25 years of economic liberalisation. The discussion on this make-or-break decision has come out when India euphoria is high, since May 2014. It could get only better beyond 2015, when efforts of Modi Government will translate to on ground beneficial impact. The house is divided on the issue, some advocating Chinese model and many to go the way of other South Asian emerging markets. India requirements are somewhere between the two options, given the wide geography, huge population and complex political environment.

Macroeconomic fundamentals have turned good, but long way ahead to gain confidence

India is big in terms of geography and population, but the balance sheet size is not reflective of the potential. India GDP is not significant compared with many; but if sustainable 8-10% growth is maintained for the next 25 years, India would emerge as one of the major economic forces in the World. Scaling up of growth rate would mean comfortable fiscal position, and creation of public money for investments. The present position of "borrow-to-consume" mode gives no comfort. The way forward as first step is in meeting the cost from revenues, and borrow to invest in productive assets. As revenue generation picks up along with growth momentum, the system has to turn fiscal surplus to focus on social security spend. The significant improvement in inflation and Current Account Deficit is dream-come-true, not thought of during July 2013 - May 2014. The set targets on macroeconomic fundamentals for FY16-FY19 give great comfort for investors and consumers on the way forward to revive sentiments and build confidence. GDP growth target at 8-10%, fiscal deficit at 3.5-3.9%, CAD at 0-2% and CPI at 4-6% have sent positive vibes to external investors and global rating agencies. All taken, India is now seen as one of the attractive investment destinations, and gets the most attention in the elite BRICS group. Given this positive outlook, there will be off-shore long term inflows in plenty against minimal risk of reverse flow of existing foreign investments, while outflows from resident entities if any, may not be too big to cause concerns.

Political stability and good governance will enhance India balance sheet productivity and efficiency

It may not be incorrect to say that lack of political stability (and absence of political unanimity for common cause) and inefficient governance have been the problem since India Independence. The opportunities from expanded geography and consumption appetite of the huge population have not been explored. The mass affluent segment and the top-end super-rich size is small compared to the size of the lower end of the pyramid population. The system inefficiencies from below-the-line economic activities and resultant revenue leakages have kept the fiscal position poor. The Government is in "borrow to consume" mode resulting in build up of huge unproductive debt on the balance sheet and high interest cost keeping the P&L in red. While the tax revenue collection is sub-optimal, net contribution from Public Sector enterprises is negative or insignificant. Combination of leakages in revenue collections, insignificant contribution from the public sector and cost inefficiencies have contributed to poor financial reflection of India to the external world. In the absence of desired public sector investment, private investors had to take charge of building productivity in a limited scale, while foreign support is chicken-feed!

These hurdles are seen to be addressed for removal to ensure smooth ride ahead. Modi Government is on the move to plug revenue leakages through various measures - to unearth black money, monitor on disproportionate assets and control over foreign assets of resident entities. The agenda is also to expand the economic activity to where 70% of the Indian population reside to build inclusive prosperity. The financial inclusion agenda is built on economic inclusion, monetary inclusion and technology inclusion. The economic agenda on infrastructure, manufacturing and agriculture sectors will not only create consumption through capacity expansion, but will lead to creation of employment and wealth at the lower end of the pyramid. All these will need large scale investment. The combination of diverting domestic liquidity to desired sectors and opening up opportunities for external investors will do wonders in the long run. Modi themes around building skills and scale at good speed, and Make-in-India vision are steps in the right direction. It is essential to provide long term sustainable (and consistent) growth agenda to attract sustainable inbound flows to provide exchange rate stability. It is not difficult for RBI to manage excessive foreign currency inflows, while excessive outflows will leave behind growth destructive monetary impact through weak Rupee, high interest rates and liquidity squeeze.

India development agenda and larger space for foreign investors is good comfort

In the given global economic environment, India is bound to throw up huge opportunities for offshore investors. The flows into Capital Account (both debt and equity) will be lumpy through FDI flows. Although India will be less dependent on fair-weather and hot money FPI flows, the FPI flows will also increase chasing India valuation. The combination of FDI and FPI inflows will open the floodgates of inbound foreign currency flows. On the other hand, outflows from India is not expected to be significant. The net flows will be supply driven, thus diluting the risk and fear on the run on Rupee if resident Indian entities chose to invest and acquire assets abroad or from exit of existing foreign investors. For this scenario to stay sustainable, it is essential to provide long term political stability, consistent policies and maintaining high growth rate. India is in the last lap of completion of 25 years of economic liberalisation and Modi agenda to build inclusive economic prosperity through the next 25 years is great comfort to free up capital account flows. But, this is a major game-changing action which can't be taken in hurry. If strong base could be built in FY16 to step up FDI flows and get into double-digit growth mode by end of FY19, Modi 1st term report card will provide him the much needed absolute political majority to open up the Capital Account in 2019.

RBI preparedness and impact on the system

By FY19 (March 2019, ahead of next General election in May 2019), RBI foreign currency reserves will cross $500 bio on high probability of supply driven mode in the FX market from combination of low trade deficit, high net capital inflows and supply-driven forward market. The need is also to keep Rupee exchange rate competitive to FDI and exports through build up of high foreign currency reserves. The resultant supply of Rupees in the system is good to feed credit demand at affordable cost. The low cost of capital will drive money into investment for capacity-build and resultant wealth creation will spur consumption. A very high level of consumption along with supply of Rupee liquidity through absorption of external sector net foreign currency inflows is the story ahead. The cost of building reserves is high when the interest rate differential is elevated. But the beneficial economic impact on India balance sheet and social impact on the lower end of the pyramid population will be huge to the price for dollar sterilisation. It is also possible that by FY19, the interest differential will be squeezed as developed markets move the rates up while India gets into declining interest rate cycle. If Modi Government could execute their agenda well through FY16-FY19, downside risks on the system through free float of capital account will be minimal.

Let us hope for the best!

Moses Harding

Editorial contribution to International Banker, UK

India's infrastructure-build critical for growth and inclusive prosperity!

Link:- http://internationalbanker.com/finance/indias-infrastructure-build-critical-for-growth-and-inclusive-prosperity/

Analysis of RBI's liberalisation on Rupee denominated ECBs and Gold monetisation

Rupee denominated ECBs may be a non-starter!

RBI allows Indian entities to borrow in Rupees (instead of designated foreign currency) from approved foreign lenders. The intent of this relaxation ideally has to be to shift currency exchange rate risk from borrowers to lenders. In the current context, most (if not all) ECBs are kept unhedged in what is called the carry-trade funding to benefit from the huge interest rate differential between high cost Rupee funds and low cost foreign currency funds, denominated in either USD or Euro or GBP or JPY or Swiss Franc. In earlier days, given the market imperfections, FX premium (called the swap cost to convert the borrowed foreign currency into Rupees) was not reflective of the interest rate differential for various reasons from lumpy one-way demand - supply dynamics. It was then making sense to avail ECBs in foreign currency and make an arbitrage on fully hedged basis. The borrower was not concerned on the mark to market impact on the hedge from currency volatility (and the resultant credit risk impact from the market risk) during the door-to-door life of the hedge. The brave-heart borrowers chose to run the currency risk till maturity on assumption (and comfort) that annualised Rupee depreciation will be much lower than the interest cost differential enjoyed during the currency of the loan. The journey was not bad for ECB borrowers, while the pain was for short term (3-12 month) carry-trade borrowers on sudden downside value adjustment on the Rupee. Despite all these risks in play, Indian borrowers have the comfort to take exchange rate risk through unhedged ECB/FCNR(B) loans, short term usance import letter of credit or synthetic FX Currency swap transactions. Then, what is the need for Rupee ECBs?

RBI strictures on the overseas Rupee lender to undertake door-to-door hedge with an Indian authorised dealer for Rupee disbursements and repayments on a fully hedged basis is clog on the wheel. Indian swap markets have turned efficient in capturing near perfect interest rate differential, thereby cutting cost advantage on fully hedged cross-border loans or investments. This means that on a fully hedged basis, Indian borrower is better off to avail Rupee loans in domestic market, while off-shore lender has no monetary incentive to lend in Rupees instead of USD. It does not make sense for the off-shore lender to set up credit lines with Indian Banks against periodical mark-to-market settlement on the open forward leg of the swap.

All combined, while Indian borrowers (who operate on fully hedged basis) will be happy to welcome Rupee denominated ECB (to avoid hedge deals with domestic banks), off-shore lenders will see no sense to take on the operational risk on their books without significant yield advantage. It would make sense for RBI not to make it mandatory for off-shore lender to cover the underlying Rupee loan exposure against the home currency. All taken, while demand for Rupee ECB will be from entities who operate on fully hedged basis, supply appetite may not exist. Just thinking aloud to make it work!

Gold deposit scheme is step in the right direction to avoid use of domestic capital to fund bullion imports

India Gold bullion imports is conversion of financial liability to non-financial assets. While bullion imports are funded by Rupee system liquidity, conversion of bullion to jewellery get into idle mode in safe deposit lockers, adjusting for loan against gold jewellery. The recent scheme of Gold jewellery deposit scheme is firm step in the right direction with the twin objective to reduce pressure on the CAD and retain domestic capital for put to domestic use within India rather than shipping it out.

How the scheme will work to achieve desired results? Banks are allowed to accept Gold Bullion/jewellery deposits from resident entities against payment of interest. It is also said that Banks will extend Gold Metal loans to jewellery manufacturing units at a spread over the interest paid to depositors. It is not as simple it looks. The manufacturer will need bullion bars, which have to be shipped in from overseas suppliers. Ideally, only the nominated banks authorised to import Gold will become eligible to accept Gold deposits. Banks instead of making payment at sight (or with usance) to the supplier will issue perpetual revolving letter of credit not exceeding the value of Gold deposits held (with 10-25% hair cut) in favour of the suppliers. Such SBLCs can be discounted by the overseas supplier in the off-shore market. On due date of payment, discount of the fresh LCs will kick-in for payment to the discounting bank. This cycle will be perpetual in nature to avoid conversion of Rupees into USD for import of bullion till the system get into Current Account Surplus mode, when foreign capital can be used to fund Gold imports. It is a very good move and the beneficial impact is to be seen from how it gets implemented.

Neutral impact on Rupee exchange rate

Combination of these two measures will cut ECB $ supplies and remove Gold $ demand. The beneficial impact is also from retaining domestic liquidity for domestic uses. RBI strategic agenda to turn surplus on Current Account and preserve domestic capital against unproductive use are steps in the right direction. RBI follow-up actions to ensure speedy implementation by removing hurdles on the way ahead is critical.

Moses Harding

Currency Markets: Weekly update for 25-29 May 2015

US Dollar restores bullish undertone

DXY sharp reversal from 100 (13th April high at 99.99) passed through support zone of 95-96.50 for stretch into lower end of set strategic base at 93-94.50 (15th May low at 93.13) before recovery into 96.50. The downside trigger was from delay in FED rate hike shift, and back into bullish rhythm is from front-load of QE by ECB. What next? DXY focus is now at 94.50/95.50-98.50/100 in bullish consolidation mode with target into 98.50-100.

EUR/USD is at mid-point of 1.05-1.15 (at 1.10) post reversal from end of recovery zone of 1.1450-1.1500. The relief recovery from 13th April low of 1.0519 is seen to be done at 15th May high of 1.1466) shifting focus into 1.05-1.0750.  For now, set focus at 1.07/1.0750-1.11/1.1150 with bias into lower end, ahead of hold at 1.0450-1.05.

USD/JPY held firm (and steady) at set strategic support zone of 118-118.50 (30th April low at 118.47) despite price volatility against other currencies. The recovery from here (in traction with DXY recovery) hit 121.56, short of set resistance zone of 121.85-122.00. Over all, it has been back-and-forth mode at 118.50-122 (against DXY swings at 93-100). The bullish momentum is good to take out 121.85-122.00 for 123.65-124.15. BOJ would be happy to see JPY at June 2007 levels from October 2011 high of 75.55.

GBP/USD had mirror impact with EUR/USD, first at 1.45-1.55 (Euro at 1.05-1.10), and then for upward shift at 1.50-1.58 (Euro at 1.07-1.15) before down at 1.5450-1.55 (against Euro at 1.10). For now, resistance at 1.56-1.5650 is seen to hold for test/break of 1.5450 into 1.51.

Rupee under pressure with most cues against

The moves since April is to the script! USD/INR bullish undertone identified at 62.00-62.15 for sharp recovery into 64.20-64.35 (end May'15 $ sell zone of 64.35-64.50) before correction into 63.20-63.45 (end June'15 $ support at 64.00). It's all done with 62.07 to 64.28 to 63.45 moves. What next? The short term outlook is retained for $ bullish consolidation at 63.20/63.45-64.60/64.85 against 12M $ sideways mode at 67.75/68-69/69.25. Rupee will be under pressure from external headwinds (diluted FII appetite for India, DXY bullish momentum and squeeze in India-US yield spread) and domestic cross winds (from growth-inflation conflicts and bearish undertone on equity & bond markets) to set up rest of 2015 trading range of 63-66 with immediate bias into higher end before recovery into 63 in H2/FYI6. With immediate focus at 63-64.50 (lower-half of big picture focus at 63-66), it is prudent to stay risk-off on imports (and short term carry-trade $ liabilities) at 63-63.50, while exporters await $ recovery into 63.85-64.00 and 64.20-64.35 ahead of 64.60-64.85. For the week, retain zoom-in focus at 63.45-63.95 (within 63.20-64.20). See huge $ bids at 63.20/63.35-63.50 from most stake holders including RBI.

EUR/INR traded to the script from 71.00-71.25 to 65.50-65.75 to 73.00-73.25 to now at 69.50-70.00. What next? Post the extreme price volatility at 66-73, it is now around mid point at 69.50. Combination of EUR/USD pressure into 1.05-1.0750 and USD/INR gains into 64.20-64.35, near term focus is set at 67.50-70.50 with bias into lower end. Hold short entry at 73.00-73.25 for 67.50-67.75 with trail stop revised down from 71.50 to 70.50.

Good luck & have a great week ahead!

Moses Harding

Gilts Markets: Weekly update for 25-29 May 2015

US 10Y back to stability

US 10Y Treasury yield spike from 1.85% to 2.35% caused panic and reversal from 2.35% to 2.20% is relief. The spike despite outlook of FED delay on rate hike shift from June to Q4/2015 is attributed to investor risk-on sentiment driving cash from Bonds to equity. All taken, it is in order to expect near term stability around mid-point of short term big picture at 1.85-2.35%. For the week, let us set focus around 2.10% at 2.0-2.25% seen as risk-neutral zone between risk-on equity and risk-off Gilts.

India 10Y bond weak with most cues against

India got the new 10Y bench mark at 7.72% (at 14 bps premium to old 10Y close at 7.86%), which is high against ideal level of 7.55-7.65%. The cues which turned against are India-US 10Y yield spread squeeze from 5.90-6.0% to 5.50-5.60% and risk of next round of Rupee depreciation from 63.20-63.45 to 64.60-64.85 driven by DXY bullish pick-up from 93.00 to 95-96.50. The outlook on domestic interest rate trend is also not positive given the limited bandwidth, excess of supply over demand and low appetite against limited upside when the excess SLR baggage is big. All combined, new 10Y bond coupon at 7.72% at 5.5% spread with US is not bad at all.

For the week, attention will be on RBI rate (and liquidity) action on 2nd June policy review date. The expectation is 50:50 between 25 bps rate cut and pause and near-zero hope on CRR cut. Despite April CPI at sub 5%, RBI is not seen comfortable on sustainability here. More so, the outlook seems to be on build up of downside risks into 5.5-6.0% by end of FY16. Given this outlook against 50-100% probability of FED rate hike between October - December 2015, RBI delivering rate cut at 1.75-2.0% spread between Repo rate and CPI is unlikely; at best, last round of 25 bps cut with caution that rates can move either way in traction with CPI trend. All taken, let us set focus on 7.72% 2025 at 7.65-7.80% and on 8.40% 2024 at 7.80-7.95% in back-and-forth mode. It will not be a surprise as investors lighten the SLR book at lower end in sell-on-recovery mode, while fleet footed traders play for back and forth mode. The risk is from trader's stop-loss trigger and the reward will be from ease in US 10Y yield into lower end of 2.0-2.35% to attract appetite at spread of 5.65-5.70%. The relief will also be from risk-off stance shifting cash from equity to Gilts. All taken, it may not be prudent to chase gains beyond 7.65% (new) and 7.80% (old) and to build strategic book at 7.80-7.85% (old) and 7.95-8.0% (old).

Good luck & have a great week ahead.

Moses Harding

Equity Markets: Weekly update for 25-29 May 2015

Global cues continue to stay supportive

Most cues turned in favour to support bullish consolidation in global equity markets. The shift of expectation in start of FED rate hike cycle from June to October-December 2015, front-load of ECB QE and China in ultra - accommodative monetary policy mode are the major cues which came into play to support MARKET PULSE outlook for sustained intra-May recovery in DJIA index from 17733 to 18351. The expectation is for set up of bullish consolidation at 18000-18500 with attention on US economic data that would throw clarity on FED rate actions. At this point, it is not clear on the timing of rate hike between October to December 2015, while there is an unanimous expectation of hike not beyond 50 bps through 2016, when ECB (and others) may start unwinding QE and ZIRP/NIRP support to financial institutions.

DJIA posted an all-time hike this week at 18351 (on 19th May) before minor pull back to 18217 with close at 18232, retaining bullish momentum into 18500. The positive takeaway is the bullish stability (against minimum volatility) for steady intra-2015 rally from 17037 (low on 2nd February) up by over 7.5%. For the week, good to retain focus at 18000-18500 in bullish consolidation mode.

Mixed domestic cues and nervous investor sentiment sets up increased price volatility

India Growth pressure building downside risks to FY16 GDP growth target of 8.0-8.5% and lack of comfort from RBI on sustainability of FY16 CPI at lower end of 4-6% comfort zone have emerged as spoil sport for India equity markets. The intra-2015 recovery in Brent Crude from $45 to $70 by over 50% has unwound most of positive impact on inflation and CAD against Rupee depreciation from 61.29 to 64.28 since end January 2015. Most stake holders are in the process of reviewing FY16 GDP growth at 7.0-7.5%, and RBI caution on downside risks on CPI into 5.5-6.0%; consequent emergence of growth - inflation conflicts provide little bandwidth for RBI to cut Repo rate beyond 7.5% or cut CRR to drive operating policy rate from Repo to Reverse Repo rate, from 7.5 to 6.5%. Given this macroeconomic play in FY16, FII appetite for India equity assets will stay diluted from now on for shift of stance to sell-on-recovery for unwind of existing exposure. It would need strong domestic appetite from DIIs and Pension & Provident Funds participation to arrest downside risks.

The nervous undertone has already brought in excessive price volatility, NIFTY between 7950/8000-9000/9150 and BNF at 17200/17450-20500/20650 since March 2015. While the intra-May recovery in NIFTY from 8000 to 8500 (BNF from 17250 to 18750) is relief, but sustainability here is in doubt in the absence of supportive tailwinds and build up of resistive headwinds. All combined, MARKET PULSE strategy was to end the NIFTY chase from set buy zone of 7950-8000 (BNF from 17200-17350) at 8450-8500 (and 18700-18850) and switch sides with short build for re-visit to 7950-8100 (and 17250-17700).

Bearish consolidation ahead of post policy sell off

The rate cut expectation on 2nd June is providing consolidation in NIFTY at 8350-8500 and BNF at 18350-18850. The squeeze in May/June Futures premium indicate the weak pulse of investor sentiment ahead. The strategy is to sell June NIFTY futures in 3 lots at 8500/8550/8600 and June BNF at 18700/18775/18850 for test/break of 8350 (and 18350) for 1st reversal target at 8100/17700 ahead of 8000/17250. At this stage, let us stay neutral on NIFTY downside break beyond mid December 2014 low of 7961 (risk below 7950), while Bank NIFTY is seen more vulnerable to downside risks on test/break of intra-2015 low of 17246 for explosive move into October 2014 low of 15130. In the absence of credit pick up from growth pressures, current issues around NPA  and elevated Gilt yields are serious risks in play on Bank's profitability to support future earnings against elevated valuation.

For the week, ahead of 2nd June policy review, retain NIFTY focus at 8250-8550 and BNF at 17850-18850. Retain strategy to sell June NIFTY at 8500/8550/8600 (with stop at 8625) and June BNF at 18700/18775/18850 (with stop at 18925) for 8100/17250. Also retain, BNF under performance to NIFTY. All combined, post-policy trading focus is retained at lower-half of set 2015 play at 7950/8100-9000/9150 (at 7950/8000-8500/8550. BNF at lower half of set 2015 focus at 17250/17400-20500/20650 (at 17250/17350-18850/18950). It is not the time for strategic investors to stay invested for beyond 2015, when downside risks dominate in H1/FY16. Till signs of emergence of supportive cues in H2/FY16, cash is the king as leveraged play will stay tuned to sell-on-recovery mode at/beyond set resistance at 8500-8550 and 18700-18850. The market sentiment beyond this week is in the mode of sell on 25 bps rate cut and sell more on rate pause. The relief beyond set resistance zone is only on combination of 25 bps rate cut and 50 bps CRR cut, which is near-zero probability. Tighten your belts for high price volatility ahead!

Good luck & have a safe week ahead!

Moses Harding

India Currency Markets: What next?

Rupee in opposite traction with USD

While USD Index (DXY) fell from 100 to 95.00, Rupee lost from 62.00-62.15 to 64.20-64.35 (62.07 to 64.28). MARKET PULSE lifted the USD/INR base from lower to higher end of strategic support set at 61.65-62.15, seen good to trigger value adjustment to 64.35-64.85 before consolidation at 63.35-63.85. It was bang on! It was precise in EUR/INR as well, the fall from 71.00-71.25 held at set end of reversal zone at 65.50-65.75 before building steam to take out 71.00-71.25 for extended rally into 73.00-73.25. In the meanwhile, EUR/USD broke out of 1.0450/1.05-1.10/1.1050 into 1.1100/1.1150-1.1.1450/1.1500 thanks to possible delay in FED shift into rate hike cycle, expectation deferred from September to December 2015.

Period of consolidation ahead of downside risks on Rupee

USD/INR near term trading range is already shifted up from 61.50-63.00 to 63.00-64.50 in consolidation mode. At this stage, it is not clear whether the next round of adjustment will be for revert back to 61.50-63.00 or step up to 64.50-66.00. The bias is clearly in favour of upward shift with major cues in favour of the US dollar. DXY is seen to form base at 91.50-92.50 (EUR/USD resistance at 1.1550-1.1650) for revert back to 95-100 (EUR/USD into 1.0650-1.1150); pipeline 50 bps rate cut from RBI against 50 bps rate hike from FED (ahead of possible shift of operating policy from Repo-MSF to Reverse Repo - Repo corridor) and resultant squeeze in India-US 10Y yield spread below 5.50-5.60% - these two factors are major short term risks on Rupee, when FII appetite stay low. When most cues are turning against Rupee, it is prudent to stay risk-off on short term USD liabilities, risk-on on short term USD assets and risk-neutral on long term USD assets and liabilities. Having already covered end May'15 exports at 64.35-64.50 (at spot above 64.20) and end June imports at 64.05-64.20 (at spot 63.50-63.60), now shift focus to 12M USD/INR play at 67.75/68.00-68.75/69.00 (spot not beyond 63.00/63.35-64.65/65.00 covering ease in 12M premium from 7.15 to 6.65% post 50 bps rate cut). For now, let us set USD/INR spot focus at 63.35/63.50-63.85/64.00, overshoot not beyond 63.20-64.20; recent low of 64.28 expected to stay safe till August policy review.

Post the sharp recovery in EUR/INR from 65.50-65.75 through 71.00-71.25 to 73.00-73.25, it is consolidation phase at 71.75/72.00-73.00/73.25. The near term breakout bias is not clear, and if any will be shallow not beyond 25-50 paisa. It is safe to trade end to end with appetite to add on breakout with stop at 71.25 or 73.75.

Moses Harding

India Money Markets: What next?

External headwinds against domestic rate cut hope support

India 10Y Bond was in comfort zone at 7.65-7.80% against sideways mode in US 10Y yield at 1.85-2.10%, steady call money rate around Repo rate and Rupee appreciation from 63 to 62.00-62.15. The 25 bps rate cut hope provided solid support at 7.80% for post rate cut push into 7.50-7.65% with added support momentum from elevated India-US 10Y yield spread at 5.90-6.0%.

The bolt from the blue was from all sides; US 10Y yield spiked through 2.10% into 2.35% squeezing the yield spread to 5.50/5.60% (lower end of set focus at 5.50/5.60-5.90/6.0%), squeeze in domestic liquidity pushed overnight rates up cutting the carry premium and Rupee pushed down from 62.00-62.15 to over 64.00 despite DXY losing ground from 100 to below 95. All these sudden developments pushed 10Y bond yield up to 8% unwinding the post-NaMo rally from 8.65% to 7.60% in roller coaster ride.

Loss of appetite against huge pipeline supplies is worry despite rate cut ahead

Post relief from 8%, 10Y bond continue to struggle at 7.90-7.95%, despite cues turning better. Rupee swift recovery from 64.28 to 63.45 and ease in US 10Y yield from 2.35 to 2.10% are major relief. The concerns now are from elevated near/short term money market rates and loss of appetite from Banks (against huge excess SLR) and other financial intermediaries. The risk of limited upside from here has led to shift of DII appetite from Gilts to Corporate bonds, while FIIs are already in exit mode. All taken, 10Y bond 8.40% 2024 is expected to stay boxed at 7.85-8.0%, into lower end on 25 bps rate cut or into higher end (and beyond) on rate pause. Relief rally beyond 7.85% into 7.50-7.65% can only be from 50-100 bps CRR cut driving the operating policy rate from Repo-MSF to R/R-Repo rate corridor, which is not seen to be in RBI radar at this stage, maybe in August review. Having said all these, RBI support at 8% will get strategic investors to build for intra-2015 pull back into 7.50-7.65%.

For now, let us set focus at 7.85-8.0% with attention on India-US 10Y spread at 5.70-5.95%; given the high probability of US 10Y yield stability around 2.0%, India 10Y yield would settle at 7.70-7.95% with bias into lower end. The strategy is to stay in sideways mode at 7.85-8.0% awaiting shift of focus into 7.70-7.85% soon. Good luck!

Moses Harding

India Equity Markets: What next?

Roller-coaster ride in 2015

It has been major two-way swings since mid December 2014 to now! NIFTY moved sharply up from 7961 to 9119 (by 14.5%) before pushed down by 12.3% (to 7997). Bank NIFTY two-way momentum was sharper at 19.5% on its up move from 17502 to 20907 before 17.5% push down to 17246. Post this high speed volatility, market sentiment is weak (and nervous) at 8100-8300 and 17600-18300 in sideways mode. The back-and-forth move within set cheap-to-acquire zone of 7950-8100 (17200-17550) and hot-to-hold zone of 9000-9150 (20650-21000) is good, but the speed either-way was scary for many!

Global cues in favour against weak domestic sentiment

The undertone is nervous, to put it mild, despite mild external tailwinds from bullish undertone in DJIA index at 18000-18500, ease in US 10Y bond yield from 2.35% to 2.10% and steady USD Index at 92.50-94.50. Brent Crude is also seen in comfort zone at $60-70. The absence of economic data support for FED shift into rate hike cycle in June - September 2015 is major relief. Despite all these positive cues in play, worry is from FII sentiment (and appetite) for India equity. Given the short term risk on Rupee (post relief from 64.28 to 63.45), FII flows likely to stay muted shifting focus to developed or other emerging markets.

The domestic cues are not bad to cause discomfort. The positive factors are from absolute comfort on inflation, with CPI at ease below 5% and WPI sharply down below par. Given the CPI ceiling at 6%, RBI has sufficient grounds to push the Repo rate down to 7% with either one-shot 50 bps or in 2 steps on 2nd June and August review. The issue however is from elevated short term money market rates, making the policy transmission ineffective including sovereign yield curve. There is no great comfort on the ability to sustain FY16 GDP growth at target zone of 8.1-8.6%, against RBI target of 7.8%. The capital (debt and equity) expansion is yet to pick up in the absence of adequate demand, keeping capacity expansion subdued. There are signs of consumption - investment disconnect at this stage to exert downside risks on set growth target. There are no major risks in play on twin-deficits despite growth pressure and partial unwind of benefits from Brent Crude and Gold price value. All taken, the trump card is with RBI to ease liquidity pressure (through aggressive CRR cuts) with or without cut in policy rates. Combining all these emerging cues into play, MARKET PULSE strategic view was not to chase NIFTY beyond 7950/8100-9000/9150 (Bank NIFTY 17250/17600-20650/21000) till end of H1/FY16 for review after clarity on timing (and quantum) in FED rate action and trend in macroeconomic fundamentals to get sovereign rating upgrade into focus or otherwise.

Nervous undertone ahead despite favourable global cues and more accommodative monetary policy stance

Despite NIFTY recovery from 7950-8000 (Bank Nifty from 17200-17350), struggle at 8200-8350 (and 18000-18350) is worry. The immediate directional bias on the market is mixed reflected from low liquidity and squeeze in May & June Futures premium. The buy-dips support is not with intent to hold for long but with greed to sell post rate cut on 2nd June or otherwise. The sell-on-recovery appetite is huge at 8300-8350 (and 18350-18500) in anticipation of post policy push-back into 7950-8000 (and 17200-17350). At this stage break-out bias is neutral within near term big picture at 7950-8550 (and 17200-19100). How to trade this market, then? Let us keep focus at 8165/8200-8315/8350 (17900/18000-18400/18500); break-out either-way will be swift into 7950-8000 (17200-17350) or 8500-8550 (18950-19100). The liquidity has to be from DIIs as FIIs will be in search for exit having already switched focus to home market or other emerging markets.

All taken, strategy is to stay end-to-end at 8165/8200-8315/8350 (17900/18000-18450/18550) with tight stop on break for 1:3 risk-reward play. 

Good luck!

Moses Harding

Relief for Global markets from cues not in favour of early FED rate hike

US Economic data not supportive of early rate hike

While many were looking for June 2015 rate hike by FED, MARKET PULSE view was for not earlier than September 2015 with higher probability at front-end of Q4/2015 with maximum of 2-step 25 bps hike before extended pause through 2016. Based on this outlook, did not suggest to chase DXY gains beyond 100 (Euro weakness below 1.05) and DJIA recovery from 17000 to 18500 against ease in 10Y US yield from 2.35% to 1.85%. Accordingly, DXY got pushed back from 100-100.50 to 95-96.50 (EUR/USD from 1.0450-1.05 to 1.10-1.1050), DJIA recovered into 18000-18500 and US 10Y bond yield hit 1.85%.

Weak economic data print points to delayed start at back end of Q4/2015

It was extended relief for markets from prospect of further delay in start of rate hike cycle to December 2015 or early Q1/2016 (from September - October 2015), while retaining the quantum of hike at 50 bps through 2016. This change in outlook pushed DXY below 95-96.50 into 92-93.50 (EUR/USD beyond 1.1050 into 1.14-1.1550) and stability in DJIA at 18000-18500. What is intriguing is the sharp spike in US 10Y yield beyond set consolidation zone of 1.85-2.10% into 2.20-2.35%?!

What next? Period of consolidation without clarity on the turnaround point

While the medium/long term outlook is intact, pipeline economic data will provide clarity on review of the timing of start of rate hike, having already priced-in December 2015 rate hike. The risk remains for review of outlook back to September/October 2015 (on positive data print confirming growth momentum, consumption pick-up and lower unemployment) rather than delay of the inevitable beyond December 2015.

It is difficult to set turnaround point at this time, while markets continue to stay in buy-dips mode in DJIA into 18000 for 18500, sell-on-recovery mode in DXY into 95 for 92 and buy-on-dips mode in EUR/USD into 1.1250 for 1.1550, but beyond here will be high risk chase till better clarity from pipeline economic data print from the US and Euro zone. US 10Y bond yield at 2.35-2.50% is good cover for 50 bps rate hike between October-December 2015 for short term consolidation play at 2.0-2.35% and break out either way is excessive.

All taken, near term outlook is for bullish consolidation mode in DJIA at 18000-18500 for print of new high above 2nd March 2015 high of 18288, sideways mode in DXY at 91.50/92.25-94.50/95.25 (EUR/USD at 1.1050/1.1150-1.1550/1.1650) and neutral consolidation mode in 10Y bond at 2.10-2.35%. The strategy is to stay back and forth with stop on break either way.

DXY unwind from over 100 to below 93.50 is relief to Gold with 2-step recovery from 1135-1145 and 1160-1170 to 1220-1235. An extended bearish consolidation of DXY can extend recovery beyond 1225-1235 into 1245-1270 before down to 1145-1270. The strategy is to be in buy dips mode into 1205-1215 for switching sides at 1250-1265 with tight spot either way.

Brent 2-step recovery from 45 and 52.50 met recovery target of not beyond 70-72 (high at 69.63), post which finds support below 65 at 64.00-64.25. Retain set short term focus at 60/62-70/72 with no major cues to trigger sustainable break out either way.

Moses Harding 

NaMo 1st year report card on India financial markets: Rating 8.3 on 10!

Swift off the block with loss of steam at the last mile

The NaMo success story (and resultant valuation impact) since mid May 2014 to 1st week of March 2015 is from mix of luck factors from external cues, hope factors from domestic economic revival given the political stability, and euphoria factor from NaMo personality traits around execution capabilities. The external cues were largely driven by fall in Brent Crude price from over $115 into 45-60 (by over 50%) and huge FII flows against QE and Zero (or negative) interest rate regime in developed economies. The fall in Brent Crude and Gold prices, and removal of issues around policy paralysis, regulatory irritants and administrative bottlenecks changed the outlook on India macroeconomic fundamentals. The FY16-FY19 targets at 8-10% for GDP growth, 4-6% for CPI, 3-3.9% for fiscal deficit and 0-2% for CAD are numbers that were not in the radar during July 2013-May 2014. Modi themes around effective and clean governance, Make-in-India vision, building skills and scale at good speed for higher productivity, infrastructure focus for scaling up manufacturing and agriculture sectors, financial inclusion to ensure economic well being translate into last mile social well being for inclusive prosperity, and many more are great news when the global economy is at squeeze. Modi made the World believe that India is the best destination for next couple of decades. The follow-up actions are from moving around the World with "red carpet" and "white flag" building deeper connect (and engagement) with developed and neighbouring countries. Internally, he sought cooperation with all non-BJP State Government leadership to work together for common cause of economic growth and poverty alleviation to make India a better place to live and make it comfortable for doing business in India. All taken, the positive shift is from risk of sovereign rating downgrade to expectation of upgrade; this kind of shift in outlook from before May 2014 to post NaMo period is dream come true! The other beneficial impact is from the provision of necessary bandwidth to RBI for shift from hawkish monetary policy stance (inflation defensive strategy) to dovish stance (growth supportive strategy) with delivery of 2-step 25 bps cut in policy rates between January to 1st week of March 2015.

All combined, investors built valuation premium around significant improvement in macroeconomic fundamentals largely driven by external cues, hope premium from scaling up in economic activity and euphoria premium on Modi execution capabilities. The outcome is obvious, triggering re-rating of India assets with sharp spike (from May 2014 to first week of March 2015) across asset classes; NIFTY up from 8th May 2014 low of 6638 to 4th March 2015 high of 9119 (by over 37%), Bank NIFTY outperformed NIFTY with rally from 7th May 2014 low of 12877 to 28th Jan 2015 high at 20907 (by over 62%) and India 10Y bond 8.40% 2024 gained from 8th August 2014 low of 98.15 (from over 8.65%) to 4th March 2015 high of 105.25 (to below 7.65%). Rupee did punch post-Modi high at 58.33 on 23rd May 2014 but lost 10.20% to post intra-2015 low at 64.28 (on 7th May 2015). While Rupee value adjustment is excessive, but seen in order if seen against RBI build-up of $ reserves and DXY rally from 8th May 2014 low of 78.90 to 13th March 2015 high of 100.39 by whopping 27%. The need to retain Rupee competitive to India exports and attractive for FDIs to participate in Make-in-India agenda is sensible.

What went wrong in the 1st week of March 2015 triggering sharp reversal?

The reversal from peak of 1st week of March 2015 (post delivery of 2nd round of rate cut) is sharp, but need to be seen as fair value adjustment given the economic consolidation phase in FY16 and risk of limited upside from high base effect, thus triggering profit booking taking money off the table. While there is no change in fundamental dynamics, the fear is also from unwind of part of the premium built around supportive external cues driven by recovery in Brent Crude from 45.19 to 69.63 by over 50% and dilution in FII appetite as FED prepares for shift into rate hike cycle in H2/2015. While the premium built on sustainable improvement in macroeconomic fundamentals is retained, euphoria premium built around NaMo is partially unwound given the political resistance to economic reforms policies and consequent risk of delay in execution of set vision objectives. All combined, unwind of luck and euphoria while retaining hope triggered correction (against long term bull trend) from 1st week of March 2015 to end of 1st year term of NaMo.

NIFTY pushed down by 12.30% (from 9119 to 7997), Bank NIFTY down by 17.50% (from 20907 to 17246), 10Y bond down from 105.25 to 102.50 for push back from 7.60 to 8.0% and Rupee down from 61.65 to 64.28 by 4.25%. Despite the sharp correction since 4th March 2015, the net year-on-year impact on NaMo 1st year score card is impressive; NIFTY up by over 15%, Bank NIFTY up by over 27%, 10Y bond up from over 8.65% to below 7.95% and Rupee down by 8.5% against rally in USD index by 20%. All taken, Indian financial asset markets have created significant wealth for retail and institutional investors during the 1st year of NaMo regime.

Rating score card for the India Inc CEO:

It is important to measure the performance across various levels - strategic intent and capabilities, building tactics to plan implementation and execution capabilities for on-ground impact. NaMo scores very high (9.5 on 10) on strategy and intent given the efforts he had taken to sell India story within and outside. The policy initiatives that have been taken to convert India as one of the best place for doing business and the connect made with all stakeholders is commendable. NaMo scores good on tactics (8.5/10) given the swift initiatives taken and some pending in pipeline against internal resistances. NaMo scores above average on execution (7/10) but the efforts taken to shake up the bureaucracy and administrative machinery, plugging revenue leakage and stringent measures to punish unfair practices in the system gets higher score despite lack of visibility on on-ground beneficial impact; it is fair to give the benefit of time. All combined, NaMo deserves high score of 8.3 on 10 for scripting a better face of India to the outside World and improving the sentiment and confidence of the people who have given this responsibility to NaMo.

Outlook for the 2nd year report card

The positive cues are from sustainable improvement in macroeconomic fundamentals; GDP growth stability above 8% against steady CPI at 4-5% will shift the system liquidity from deficit to surplus driving the overnight sovereign yield from Repo to Reverse Repo rate, fiscal deficit will trend into 3.5% from combination of growth driven income and arresting revenue slippage and collection inefficiencies. Stability in Brent Crude at $50-85 against expanded exports (and NRI/FDI inflows) will retain CAD/BOP in comfort to provide long term Rupee stability. The major risk is from implementation of execution plans built around strategies to upgrade India economic and social well being for move into the elite club of developed economies. The trump card is from possibility of sovereign rating upgrade in H2/FY16.

NIFTY has strong base at 7950 but do not rule out extended correction below 7950, seen as unsustainable. Strategic investors would be glad to absorb weakness below 7950 for minimum 15% upside reward for retest of 2015 high at 9119. If all goes well, NIFTY will derive momentum for Mount 10K. All taken, will not be surprised to see 15-25% rally from base around 7950 for better 2nd year performance over 15% of 1st year. Similar view on Bank NIFTY for base formation around 17250 for 21000 for over 20% gains.

10Y benchmark has upside potential at 7.25-7.75%. Given the best case Repo rate at 7.0-7.25%, 10Y bond upside is limited at 7.50-7.65% and would need shift of operating policy rate from Repo to Reverse Repo rate for extended gains below 7.50% for 7.25% and beyond. It would need to make the system lend to RBI for effective capital flows to fund capacity expansion. All taken, there is high probability of 10Y bond rally from current 7.95% to 6.75-7.50%. CPI stability at 4-4.5%, fiscal deficit control at 3.5-3.75% and Brent Crude stability at $45-70 will be the triggers for extended gains below 7.50-7.65%.

Rupee exchange rate has not caused pains to most stakeholders on move from 59 to 64. It may be a repeat performance this year too as worst case seen not beyond 68-69 and best case at 64-65 by mid May 2016.

All taken, NaMo 2nd year report card is expected to maintain the 1st year momentum with higher probability of exceeding expectations.

Job well done, Mr. Narendra Modi and best of luck for better performance in the 2nd year! God bless!!

Moses Harding