India Financial markets: In extended bear phase!

Shift from bull to bear phase since 1st week of March 2015

India glorious bull-run since August 2013 - May 2014 had a sudden and abrupt end in early March 2015. Since then, financial markets across asset classes got into the bear phase, posting lower high's and lower low's on monthly basis. However, comfort is from not seeing a one-way free fall, but with bouts of strong recovery followed by gradual reversal.

The bear phase is evident from NIFTY posting lower high's from 9119 (4th March 2015), 8844 (15th April), 8489 (22nd May) & 8467 (1st June), and lower low's from 8269 (27th March 2015), 8144 (30th April), 7997 (7th May) & 7940 (12th June). It's worse in Bank Nifty from drop-down high's from 20907/20541 (January -March 2015) to 19038-18832 (April - June), and slip-down low's from 17719 to 17174 during March to June 2015. The old 10Y bond 8.40% 2024 yield is sharply up from 7.50-7.65% to 8.0-8.15%, and the new 10Y bond 7.72% 2025 yield is up from 7.62% to 7.92% post issuance. Despite lift of USD/INR base from 61.29 to 63.45 (between January to June 2015), Rupee has stood firm against bullish momentum on the USD, adjusting only for the time-decay.

Relief not in focus against external headwinds and from domestic irritants

Global cues will stay resistive for rest of 2015. The major setback for India will be from Euro zone woes (from Greece), and FED shift to tight monetary policy. Grexit risk is seen to be deferred, and it would need lot of financial support (and sacrifice) from ECB (largely funded by Germany and France) to keep Greece in the Euro zone. Indian markets are set to face stiff resistance from weak US equity market (DJIA index building downside risk from/below 18350-18500 to 16850-17000), firm US Treasury yields (10Y into higher end of set focus at 2.20/2.35-2.60/2.75%) and strong USD (DXY into higher end of 93/94.50-99/100.50). Minor relief, however will be from soft Brent Crude at lower end of 58/60-68/70 and weak Gold into lower end of 1135/1150-1185/1200.

On the domestic front, euphoria is behind and disappointment scare is emerging. Capital (equity and debt) availability to fuel growth is seen to be tight. Expectation of big-bang reforms is behind for aggressive capacity expansion, and the worry is from maintaining business-as-usual mode retaining hope for marginal pick-up. While the downside risk on growth remains valid, better-than-expected monsoon revives hope of 25 bps rate cut in 2nd half of FY16; but could only act as speed-breaker to the bear phase. All taken, investors are in wait-and-watch and PSU Banks have limited capacity to support growth with not enough balance sheet capital against NPA woes and earning pressure.

India equity market under pressure retaining the lower high and lower low price dynamics

Can NIFTY post a June high over May high of 8489? It's below 50% probability. Will NIFTY post a new July low below June low of 7940? It is 50% probability. NIFTY struggle at higher end of set strategic focus at 7950/8000-8450/8500 is not cheer to the bulls, while bears are seen to be in firm control at strategic no-buy zone of 8350-8500, not allowing entry into upper-half at 8425-8500. The intra-week push back from 8423 to 8329-8339 is in validation to set up of bearish momentum at/below 8425-8500. While hope of Greece resolution provide support at 8300-8335, it may not provide cheer for bullish extension into/beyond 8467-8489. For now, would continue to watch 8425-8500 resistance to hold for test/break of 8310-8335 enroute to 8050-8200 ahead of 7935-7985. It is not yet the good time for strategic investors to put cash to equity assets, given the high probability of posting new low below 7940 between July-September 2015. For now, retain set July Nifty Futures focus at 7950/8000-8450/8500 (stop at 8510 for 7965).

Bank Nifty is worse than the most sectors, driven down by PSU banks and default - support from Private sector banks. The pre 2nd June policy high of 18832 is solid with major resistance at 18500-18600. The intra-week push back from 18539 held well at 18150-18200 minor support zone. For now, continue to watch firm resistance zone at 18500-18700, which should hold for test/break of major support at 18000-18050 for 17850. The risk of posting a new low below 17174 in July-September is very much in the radar. It is good to retain set July Futures focus at 17150/17400-18550/18800 (stop at 18850 for 17200).

10Y bond under pressure despite build-up of RBI rate cut hope

Since the launch of new 10Y bond 7.72% 2025, it has been in back-and-forth play between 7.62-7.67% (seen as duration-cut zone) and 7.88-7.93% (value-build zone). Now, the strategic base is lifted up at 7.72-7.77% extending bearish momentum beyond 7.93% into 7.98-8.03% (old 10Y bond 8.40% 2024 into 8.15-8.20%). The external cues are firmly against from spike in US 10Y yield into higher end of 2.35-2.60% with risk of settle at 2.60-2.85% in H2/2015. Despite efforts to hike FII limit through Rupee exchange rate adjustment, FII appetite for India Gilts is low, and seen in pull-out mode from combination of yield spike and Rupee depreciation. The comfort from 25 bps rate cut is distant away (in October 2015 - March 2016), by then the damage would have been done and could only help in post rate cut stability at 7.80-7.95%.

The strategy now is to cut portfolio duration at 7.72-7.77/7.80% to create space to absorb weakness into 7.90-7.93% and 7.98-8.03%. For now, let us set focus at 7.77/7.80-7.90/7.93%, with Banks at the lower end (to cut duration) and RBI at the higher end to cool down bearish momentum to retain appetite for pipe-line bond auctions.

Rupee firm from interest rate advantage, but downside risks not out of the radar

USD/INR shift of base from 61.25-61.50 to 63.20-63.45 from January to June 2015 is not bad, adjusting only for time-decay interest rate/inflation differential, while not building traction with USD gains against global currencies. In the process, RBI has added adequate reserves building muscles to weather the storm ahead. While the exchange rate play has not helped carry - trade foreign currency borrowers, it has not harmed importers and exporters. The need on the way forward is to keep Rupee exchange rate competitive to exports and attractive to long term FDI inflows.

Going forward into long term, interest rate advantage may dilute on significant spike in US rates and marginal decline in India rates, driving the FX yield curve down across tenors. Taking this along with USD strength and decline in FII flows, USD/INR direction is clearly to the upside of 63-65/68 focus. If the Rupee decline is gradual adjusting only for time-decay, then the adjustment process is smooth. And if it happens sudden, as always, then there is need to protect short term foreign currency liabilities. The strategy has been to hedge 1-2 month liabilities on dips and cover 9-12M assets on spike. There is no need to review the strategy now.

Continue to retain USD/INR short term focus at 63.25/63.50-64.25/64.50 (12M $ at 67.85/68-68.85/69). It is risk-neutral play for importers to hedge end July 2015 at 63.85-64.00, and for exporters to cover end July at 64.50-64.65. Despite risk of 12M $ moving beyond 68.85-69.00 (into 70), covering long term/12M exports around 69.00 may not be bad given the time-decay adjustment. Given the RBI presence either side of 63.45-63.55 and 64.20-64.30, it is safe to retain focus here for hedge strategy. The risk of shift of focus to 64.20/64.35-64.85/65 is in the radar between July - September 2015.

EUR/INR failed at strategic resistant-cum-sell zone of 72.75-73.25 for reversal into target 70.50-71.00. It is from combination of EUR/USD failure from 1.14-1.15 to 1.1050-1.1150 against Rupee stability at 63.45/63.60-64.20/64.35. Now, the focus is towards extension into firm support zone of 69.00-69.25, while the recovery if any will be shallow at 71.50-72.00. For now, let us watch EUR/INR at 69.25/69.50-71.25/71.50 and be in preparedness for downside extension into 68.50 ahead of 66.50-67.25.

Have a great week ahead!

Moses Harding

Increase in FPI investment limit in Gilts - Do we need it?

Fiscal prudence versus adequate domestic appetite

There was need to attract foreign appetite to feed into huge Government borrowing to fund fiscal deficit at affordable cost. There was also need to get in foreign currency to fund huge Current Account Deficit and to arrest Rupee weakness. Hence, there was need to roll-out red carpet to Foreign Institutional Investors to invest in India Gilts, who made merry out of huge interest rate differential play between high yield India Gilts and Zero/Negative Interest policy regime in major markets. But, given the huge volatility in India Gilt yields and steady depreciation in the exchange rate, it is not a guaranteed return play! Most often, the FPI investment flows turns out to be a herd behaviour, either huge inflows or lumpy outflows. When the going is good, RBI step in to absorb excess $ supplies and incur sterilisation cost, building $ assets against Rupee liabilities with negative carry. It also creates importer's greed and exporter's fear syndrome on risk of extended Rupee appreciation, if RBI chose not to give cheap Rupees to foreign investors. When the going gets tough, Rupee exchange rate is at the mercy of foreign institutional investors, against limited bandwidth with RBI to protect Rupee weakness. It also creates importer's fear and exporter's greed against risk of sharp Rupee weakness. Most often, Indian entities get caught on the wrong foot, adding to NPA woes on the banking system. All taken, FII presence in Gilt market has done more harm than good, leading to exchange & interest rate volatility and sterilisation cost on the exchequer.

Now, dynamics have turned better - fiscal prudence is now established reducing the debt burden on the system; CAD is sharply down from over 4% of GDP to below 2% of GDP. The domestic appetite is huge to easily absorb Government's market borrowing schedule. The need is also to move away from hot money FII flows to stable FDI flows to establish exchange & interest rate stability. Going forward, dynamics could only become better with fiscal deficit target at/below 3.5% of GDP and possibility of turning zero deficit on Current Account. The need for FY16-FY19 is also to keep Rupee exchange rate competitive to exports and attractive to FDI flows. Given the conflict in monetary stance between RBI and the FED, and inflation trend (India CPI inflation under pressure at 5-6% and that of US steady at 0-2%), there is need to keep long term yields high to prevent run on the Rupee exchange rate. Given this scenario, is there a need to increase FII investment limit in Gilts? Why not look at shifting the limit from Gilts to other sectors where liquidity is scarce?

Will FPI welcome this move?

Most FPIs have lost out on India Gilt portfolio - 10Y bond yield is volatile, up from 7% to 9% to 7.5% since August 2013 against sharp depreciation in Rupee since May 2014. The short/long term outlook on US-India interest rate scenario against bullish trend of the US Dollar do not provide a good risk-reward play to FPIs to welcome (and absorb) the increased limit. The dependence on FPI inflows need to be cut, with the need to reduce the impact of sudden mood-swings of hot money flows hurting domestic stakeholders leading to excessive volatility beyond absorption capacity. With most anticipate spike in US 10Y yield into 2.50-2.85% (India 10Y into/beyond 7.85-8.0%) and DXY rally from 93 to over 100 (USD/INR from 63 to 68) by end of 2015 through 2016, the action to hike FPI limit may be a non-starter!

Timely benefit to domestic stakeholders

10Y bond yield was at risk sustainability at 7.90-8.0%. The two-step measures, first RBI support at 7.90% and Finance Ministry's agenda on limit enhancement shift focus from 7.90-7.93% to 7.70-7.73%. This is huge benefit for Banks and Corporate entities (with open foreign currency liability exposures) ahead of Q1/FY16 results. The mark-to-market hit from post 2nd June policy spike in 10Y yield from 7.62-7.65% to over 7.90% is hard to absorb for Banks against earning pressure and higher credit loss provision. For whatever worth to FIIs, it is indeed welcome relief for Banks and Foreign currency borrowers from drop in 10Y yield from over 7.90% into 7.70% and Rupee recovery from 64.30 to 63.50.

USD/INR exchange rate into 63.00-63.50 is welcome relief for importers and foreign currency borrowers to stay risk-off (or risk-neutral) post the fear of Rupee depreciation beyond 64.20-64.35 into 64.85-65.00/66.50. Bank's position is bit mixed; if chose to trim investment (or cut duration) at 10Y yield below 7.72%, resultant spike will cause hit on existing stock. If they don't, will FPIs step in to drive the 10Y yield into 7.65-7.70/7.72% for temporary relief in Q1/FY16 results? What next for Q2/FY16 if 10Y back at/over 7.90% on start of rate hike cycle by FED in September? It is kind of between the devil and deep sea for the Banks! It will be interesting to watch on the way forward. For traders, who rode the post-policy volatility from 7.62-7.65% to 7.90-7.93% to 7.70-7.73% can stay aside till stability is restored for better clarity ahead!

Going forward, Finance Ministry's pressure for rate cut will be on the Banks, and not RBI atleast till end of 2015. Given this against higher probability of 50 bps hike from the FED during the same period, bond yields at current (against cheap dollar) will be attractive for FPIs to take profit or cut loss (against limited upside and significant downside risk), and not adding to current portfolio!

Moses Harding

India financial markets at make-or-break zones

RBI jitters diluted by FOMC comfort

India financial markets has recovered around 50% of post 2nd June RBI monetary policy crash, and in consolidation mode taking comforting cues from the FOMC guidance. MARKET PULSE set pre & post policy focus in NIFTY at 7965/8000-8465/8500 and in Bank NIFTY at 17100/17350-18700/18850. Since then, NIFTY is down from 8467 to 7940 for gradual recovery from there into 8200-8250. Bank NIFTY took a bigger hit for crash from 18832 to 17174 for gradual pick up into 17800-17950.

10Y bond yield was hit hard for sharp reversal from 7.62-7.65% to 7.90-7.93%; but for the support from the "invisible hand", the damage would have been worse. FOMC rescue act has brought relief for recovery into 7.72-7.75%.

Rupee also took the heat for push down from 63.58 to 64.30 before post FOMC recovery into 63.65-63.70.

So, combination of RBI and FOMC monetary stance has removed the pain for cheer into the near term. But, given the short term downside risks in the radar, how far the cheer recovery could extend is the million-dollar question?

Most cues neutral and mixed, hence neutral bias on the way forward

NIFTY held at bearish make-or-break zone of 7935/7950-8000, shifting focus at bullish make-or-break zone of 8200-8250/8265. So is Bank Nifty from 17150/17200-17350 to 17850-18000/18050. The domestic cues have brought relief with better than expected monsoon. But this comfort may not be good to expect another 25 bps rate cut from RBI in 2015, when CPI inflation print is expected to inch towards 5.5-6.0% and not into 4.5-5.0%. It is less said the better on the pick up in growth momentum. While there is near term comfort from FOMC, short term outlook is not positive to India financial markets. Given this outlook, directional bias in NIFTY from 8200-8250/8265 is not clear whether into 8435/8450-8485 or 7935/7950-7985. So is BNF from 17850-18000/18050 for 17150/17200-17350 or 18650/18700-18850. What is the strategy here? The current levels are at midpoint of the set near term (from now to end July) focus range of 7935/7950-8485/8500 in NIFTY and 17150/17200-18800/18850 in BNF, setting up high risk - low reward trade either-way with not more than 1:1 risk-reward. The prudent option is to close long position at current and retain close watch on make-or-break zone of 8200-8250/8265 and 17850-18000/18050. The prudent low risk - high reward trading strategy is to "short" here, add on break of 8185/17750 or with stop/reverse on 8265/18050 break (with stop below 8200/17850). It is not yet the good time for strategic investors who can await set up of short term weakness below 7935-7950 (and 17150-17200) for 7500-7650 (and 16000-16400).

India 10Y make-or-break zone is at 7.72/7.75-7.77% post recovery from 7.88-7.90/7.93% support zone. Here, clarity is seen to be relatively better. There are no cues ahead to support 10Y benchmark to trade at premium below 7.72% given the existence of strong domestic headwinds and emergence of external headwinds beyond near term. Given the short term US 10Y yield stability at 2.20/2.35-2.60/2.85% against Rupee pressure into 64.50-66.50, the probability of India 10Y yield spike into 7.90% and beyond is high. Even in the unexpected event of RBI delivering the final round of 25 bps cut ahead of FED rate hike, the beneficial impact on 10Y yield may not be below 7.72% (and best case not beyond 7.65-7.67%) given the huge pipeline supplies against low investor appetite. The strategy therefore is to cut duration of the investment portfolio at 7.72-7.75/7.77% for duration build at or above 7.88/7.90-7.93%.

USD/INR make-or-break zone is at firm strategic support zone of 63.45/63.60-63.70. With huge RBI appetite here to build reserves (before $ supplies dry up in the short term) and bullish momentum on #DXY against base at 93.00-93.25 for bullish pick up beyond 96.50 into 98-100.50, downside risks on Rupee is high in the absence of FPI supply support. The probability of Rupee weakness beyond near term support of 64.20-64.35 is high for 64.65-65.00 before shift of short/medium term trading focus at 64.50/65-66.50/67 (between August to December 2015). The relief however will be from #DXY extended weakness below 93 (into 90), in which case Rupee recovery may not extend below 63.20-63.45. Hence, risk-reward for staying "short dollars" (through unhedged $ liabilities) will not be in favour with limited upside and not quantifiable downside risks.

All combined, market stakeholders are confused on risk position at current levels; either to stay risk-on for extension of recovery into set higher ends seen on 2nd June RBI policy day (or ride the unwind of recent recovery into the lower end seen in the previous week) or stay risk-neutral with appetite to add on recovery into the higher end (or reversal into the lower end) or stay risk-off to act on break of set make-or-break zone either-way. You are the best judge for appropriate positioning considering the size of your pocket!

Good luck!

Moses Harding

FOMC take-away: No fear or no cheer for now!

Neutral (but firm) guidance from the FOMC

FOMC was not expected to sound dovish and there were no strong cues to turn hawkish either, at this stage. The expectation was to stay neutral, while not taking away the focus of start of rate hike cycle in September - December 2015 with maximum of 50 bps hike by end 2015. The guidance was more or less to this effect - while bulls take this stance as dovish and bears see it as hawkish ahead! Given this conflict in expectation between the bulls (and existing investors) and the bears (and investors who stay largely in cash awaiting value-buy entry), it is prudent to stay positive in the near term, with cautious optimism (or pessimism) into the short term. The message from FOMC is loud and clear that US economy is getting better, and that the trend in target economic data gives comfort for start of rate hike in Q3/2015 (followed by step-up in Q4/2015). All taken, the fear of bear-run is diluted but gives no cheer to get into sustainable bullish undertone. The strategy for traders is to be in buy-dips mode, while investors stay in sell-on-recovery mode for shift from risk-on assets to low risk (or risk-off) assets, and to be in cash to absorb value-buy opportunities that would come by in the short term.

Consolidation phase in global markets - supportive tailwinds in the near term before turning resistive in the short term

The way forward for financial markets is clear; build-up of bullish consolidation in the near term (from now to July/September) for push-back for formation of "base" in the short term (October - December) before into bullish undertone in the medium/long term (into 2016 and beyond).

DJIA near term focus is set at 17500/17650-18350/18500. The strategy is to stay in buy-dips mode for switch sides at 18350-18500 for short term (end of 2015) target at 17000-17150. It is good strategic entry at 17000-17150 for start of bull-run in 2016 for 18350-18500 and beyond (for over 7% return in 2016).

US 10Y yield near term (from now to September) play is seen restricted at 2.10-2.35% before shifting focus into 2.35-2.60% in the short term (September - November) enroute to 2.60-2.85% by end of 2015. Beyond here, risk of shift into 2.85-3.10% (and beyond) is not ruled out if FED extends rate hike beyond 50 bps into 2016.

DXY near term focus is firm at 93.00/93.25-97.75/98.00; while downside break is unlikely, risk of bullish extension into 98-100.50 is not ruled out from Euro zone woes around Greece and extended QE into 2016 when FED is already into rate hike and liquidity squeeze mode. EUR/USD will find it tough to extend bullish momentum beyond 1.1450-1.1550 in the near term against base at 1.0950-1.1050. The short term bias is for revisit to recent base zone at 1.0450-1.0550, which should hold.

India has more to worry than cheer for rest of 2015

Going ahead, India financial markets is at risk from spike in US yields and firm USD, with limited FPI appetite in H2/2015. In the absence of external supportive tailwinds, domestic cues will need to provide support to stay neutral, if not bullish! But given the lack of optimism on growth (and resultant downside risks on corporate earnings) and limited bandwidth with RBI to deliver rate cut ahead in 2015, it will be wishful to expect supportive tailwinds from domestic cues. All taken, sentiment and confidence on India financial markets is not good to stay bullish beyond near term.

NIFTY near term range is seen firm at 7950/8000-8250/8300 (with cap at/below 8465-8500) and Bank NIFTY at 17100/17250-17950/18100 (with cap at/below 18750-18850). The short term outlook is weak for sharp reversal from/below 8300-8500 (and 18100-18850) for end of 2015 target at/below 7400-7550 (and 16000-16400), seen as good strategic entry point for 2016.

10Y bond outlook for rest of 2015 is not good at all against combination of rate hike mode by FED and rate pause mode by RBI. The resultant squeeze in India-US yield spread against inflation comfort in the US at 0-2% and inflation pressure in India at 4-6% is major irritant ahead. Against spike in US yield into 2.60-2.85% by end 2015, the impact on India 10Y will be hard for push into higher end of 7.75-8.0%. The impact of high US yield on Rupee will be hard if the traction is not built in India Gilt yields. In the given inflation outlook, India US 10Y yield-spread below 5.5% is difficult to sustain and if it does, it will only lead to bearish momentum on Rupee to put added pressure on inflation. All taken, see near term consolidation in India 10Y bond yield at 7.72/7.75-7.87/7.90%, for shift of focus into 7.90-8.05% in the short term, by end of 2015. There is no clarity beyond here into 2016 at this stage.

USD/INR has firm strategic base at 63.45-63.70, seen as RBI support zone to build reserves ahead of bad days ahead. Setting aside the need to maintain Rupee exchange rate competitive to exports and attractive to FDI flows, most cues would turn against Rupee in the short term triggered by bullish momentum in DXY into 98-100.50 and spike in US 10Y yield into 2.60-2.85%. Both these cues will build bearish momentum on Rupee beyond 64.35-64.85 near term support zone for shift of focus to 65-66.50 by end of 2015. All taken, set near term USD/INR trading range at 63.45/63.70-64.60/64.85 (12M $ at 68-69).

EUR/INR near term focus is seen in traction with EUR/USD at 1.0950/1.1050-1.1450/1.1550 and USD/INR at 63.45/63.70-64.60/64.85. Both combined, set near term focus at 71/71.50-73/73.50 and need to take note of overshoot beyond 73.50 in the absence of Euro strength traction on the Rupee.

So, there is good comfort to stay positive on markets in the near term (till July - September), turn risk-off in September - December 2015 riding the bearish momentum and beyond there, be on the look out for value-buy opportunities for possible bulls-chase into 2016.

Moses Harding

FOMC impact on India financial markets?

Dovish stance of start of rate-hike beyond 2015

It is the best outcome for India markets, when it is beaten down since first week of March 2015 to provide much needed momentum for relief. NIFTY will extend its relief rally from 7935/7950-8000 to 8435/8450-8500 and Bank NIFTY from 17150/17200-17350 to 18650/18700-18850. It will be great relief for India 10Y yield to unwind the recent crash from 7.62-7.65% to 7.90-7.93%. Rupee will get much needed recovery from 64.20-64.35 into 63.20-63.45 for RBI to put unlimited $ bids.

Hawkish stance of start of rate-hike on or before September 2015

FOMC signal of start of rate-hike signal on or before September 2015 will be disastrous, triggering FPI panic. NIFTY will be down at 7500-7650, BNF at 16000-16400, India 10Y yield into 7.90-8.05% and Rupee into 65-66.50 range. While it may not be very discomforting to RBI, market stakeholders will be in great pain.

Neutral stance by the FOMC

If the timing of the rate-hike is kept open between September to December 2015, it will set consolidation tone in the short term. NIFTY in sideways mode at 7750-8250, BNF at 16850-18100, India 10Y at 7.75-7.90% and Rupee at 63.85/64.00-64.85/65.00.

What to expect?

It will be wishful to expect dovish guidance from FOMC. The choice is between staying neutral or mild hawkish approach, confirming start of rate-hike cycle in September to December 2015 and open on the start date. All taken, it may not be prudent to stay heavy on risk, given the limited upside against possibility of marginal post-FOMC sell-off. It may be good either to stay risk neutral or risk-off for action post-FOMC.

Moses Harding

Whatz ahead from FOMC? Hawkish tone may be the outcome!

Mixed economic signals stay as deterrent!

No doubt, America is the best amongst the West! The economy exhibits signs of getting out of the woods. There are signs of pick-up in growth, supported by downtrend in unemployment rate, uptrend in wages, improvement in household consumption against low inflation. All these trends should provide the FED much needed bandwidth to set the time for start of rate-hike cycle, keeping the quantum of hike open subject to sustainability of favourable trend in target macroeconomic factors. The need is also to quickly get into rate-hike mode, last done in 2006 to build ammunition if the economy falters on the way ahead. So, the doubt is on the permanence of the rate-hike cycle. Will it get into extended pause after 50 bps hike in 2015? Will it be a regular time-bound hike over 50 bps beyond 2015? Will the hike be temporary, only to be reversed if the growth pick-up falters in 2016? Given the lack of long term clarity, it is good to focus on the short term preparing for 50 bps hike between September to December 2015.

Divided opinion on FED monetary stance

The expectation from FOMC is not unanimous - most see the time is not quite right to start rate-hike cycle in 2015, while some take comfort from improvement in the economy to bite the bullet now. While a dovish guidance is good for financial markets, FED may need to deal with rising US Dollar from hawkish tone, which would hurt US exports to add pressure on the top-line economy. All taken, markets stay mixed and volatile from the possible outcome. US 10Y yield is already up from 1.85-2.10% consolidation to 2.10-2.60% (and now around mid-point) and USD index DXY is in back-and-forth at 93-98 (EUR/USD at 1.0650/1.08-1.1350/1.15). It is a tough call on the FED to take a firm view on the monetary policy stance against mixed and conflicting cues in play!

Best is a balancing act around neutral stance seeking more clarity

Given the lack of defence for either a dovish stance or hawkish approach, it is better to stay neutral now deferring the decision to the next FOMC. This will provide post-FOMC price stability in US 10Y at 2.10-2.35%, DXY at 93-96 (EUR/USD at 1.10-1.15) and DJIA at 18000-18500. This will also give time to ECB to deal with woes around Grexit, when economic turnaround is taking shape.

It is best to set the timeline of rate-hike between September to December 2015, and be neutral (and data dependent) on whether it will front loaded or rear ended!

Hope FOMC goes non-event!

Moses Harding

Whatz ahead in financial markets? Near term outlook

Global cues turning against into headwinds

India financial markets "golden run" since August 2013 (to March 2015) was supported by Tsunami like tailwinds from external sector. Most prominent were the ultra-supportive monetary policy regime of developed economies, sharp reversal in commodity prices and excessive FII flows into India equity and bond markets. During this period, NIFTY was up from 5118 to 9119 (by 78%), Bank NIFTY up from 8366 to 20907 (by 150%) and 10Y bond (8.40% 2024) yield down from 8.65-8.80% to 7.50-7.65%.

The euphoric rally was brought to the ground for sharp reversal on emerging risks from FED shift into rate hike cycle in H2/2015, recovery in commodity prices by 50% from the low's and significant dilution in FII appetite for India equity and Bond assets. So, all cues that drove the Indian equity and bond assets up have reversed. The impact is obvious, but hard beyond expectations. NIFTY is down from 9119 to 7940 (by 13%), Bank NIFTY down from 20907 to 17174 (by 18%) and 10Y 8.40% 2024 bond yield up from 7.50-7.65% to 8.10-8.15%.

What next? The outlook is not supportive to India financial markets. The probability of FED shift into rate-hike cycle in H2/2015 is very high; uncertainty is only from whether the start will be front-loaded or rear-ended? The India-advantage from crash in commodity prices is also behind, as most major economies would see growth pick-up. The higher demand absorbing excess supply will reinstate the bullish momentum on commodity assets, resultant Brent Crude stability at $60-70/85 is not good news for India. It is less said the better on the FII flows, who are either badly bruised or worried over the huge opportunity loss for staying invested beyond March 2015. During this period, Rupee is also down from 58 to 64 to rub salt into the wounds! Against this pain and in the absence of euphoria ahead, FII support to India financial markets will stay diluted. The other side of the coin is the set up of value-buy opportunities for new entrants and for increasing the book with better average ahead of reinstatement of bullish momentum from the base, which is not seen to be far away! All combined, the external support may not be available in the near term till clarity from the FED on start of rate hike cycle. Till then, DJIA seen in sideways mode at 17000/17150-18350/18500, 10Y US yield firm at 2.20/2.35-2.50/2.65%, USD index building steam for upside break of 93/94.50-98.50/100 and Brent Crude in bullish consolidation at 58.50/60-68.50/70. Thereafter, risk of spike in 10Y US into 2.60-2.85% and Brent Crude into higher end of long term big picture of 52.50/55-82.50/85 is not bullish take-away for India markets.

Domestic cues weak against growth - inflation conflict, leading to euphoria dilution

Most domestic cues stay suspect on the way forward. The downside risks on FY16 GDP growth target at 8.0-8.5% is major worry, as most estimates stay well below at 7.3-7.8%. The efforts to build top-line economic capacity has not yielded desired results. Investment appetite is still low and lenders continue to stay in risk-aversion mode. While the economy-build strategy is around infrastructure, there are no signs of infusion of life (and energy) to existing projects which are under stress, incurring cost overrun from delay in operations or cash flows not good enough to service huge debt burden. In the absence of desired investor appetite and hands-off stance of financial intermediaries, it is not easy to build scale  around infrastructure, and to expand consumption and job creation. The agenda to expand manufacturing and agriculture sectors is still in the script writing stage and may not contribute to near term euphoria. All combined, the probability of FY16 GDP growth target falling short of 8.0-8.5% target is very high.

The outlook on the CPI inflation is not favourable. The downside risks are seen to emerge from inadequate monsoon, higher Brent Crude price and base effect impact from September 2015, not to mention about the supply side bottlenecks. All combined,  RBI has already increased the January 2016 target from 5.8 to 6.0%, at higher end of the 4.0-6.0% tolerance zone. If this risk is seen with possible rate-hike from FED by September 2015, it is possible that the end of RBI rate cut cycle is not far away, if it is not already over. God forbid, if CPI inflation overshoot 6% target, RBI may be compelled to deliver rate hike to maintain the Repo rate - CPI differential at stated 1.5-2.0% spread. It would be a miracle if CPI inflation print sustain below 5.5% by January 2016 to provide space for RBI to deliver the final round of 25 bps cut in Q4/FY16. This low probability event does not provide comfort in the near term.

Barring downward pressure on growth and upside risk on CPI inflation, there are no signs of major worries on twin deficits. The FY16 Fiscal Deficit at 3.9% is not at risk and the FY19 target at 3.5% keeps enough room for Government productive investment for growth; availability of growth capital from the Government is new beginning for India. Current Account Deficit is in comfort at set target of 1-2% of GDP. It is mixed outlook on the way forward, given the pipeline measures to boost exports against the risk of adverse impact from elevated Brent Crude price. RBI is seen to be in comfort in managing Rupee exchange rate stability from sustainable net capital flows. Even in the absence of FII support, long term stable flows through FDI/ECB provides great comfort. Since August 2013, RBI $ reserves are already up from $200 to $350 billion, driving Rupee down from 58 to 64 adjusting for fair value to maintain exchange rate attractive to FDIs and competitive to exports. The resultant Rupee infusion into the system is met by Banks through CRR cash and excess SLR investment. While the cost of $ sterilisation is high, economic benefit is huge adjusting for mark-to-market gains from Rupee depreciation. Moreover, RBI is in better position to defend Rupee from lumpy hot money outflows.

Markets retain bearish undertone in nervous mode

Equity market in search of "base" to build sustainable recovery:

Post the back-and-forth play in NIFTY at 7965/8000-8465/8500 (Bank NIFTY at 17200/17350-18700/18850), the focus has already been reviewed and shifted at 7500/7650-8000/8150 (BNF at 16100/16500-17450/17850) with bias into lower end. It was also preferred for immediate term consolidation at 7900/7950-8100/8150 (17100-17225-17700/17825) before revert to bearish trend; only above 8250 (18100) is relief for not beyond 8500 (18850), seen as low probability. When to build investment book, then? The first value-buy entry point for strategic investors is seen in NIFTY at 7600-7650 and BNF at 16200-16350; till then the market tone will be on sell-on-recovery mode with high probability of back-and-forth mode at 7600-8100/8165 and 16100-17850/18100, breakout either way is not expected to sustain.

Gilts under pressure despite sharp reversal

10Y bond 7.72% 2025 is down from 7.62-7.65% to set worst case target at 7.88-7.90% (old 10Y benchmark 8.40% 2024 is down at over 8.10%, unwinding 50% of the long term rally from 8.65-8.80% to 7.50-7.65%). There are no positive cues ahead, except RBI support through OMO bond purchases. The elevated yields at mid to long tenor is burden on interest cost of the Government over time, thus marginal pressure on the Fiscal Deficit. Leaving this aside, Bank's comfort from market-to-market gains in the SLR portfolio to cover for higher credit loss provision is now gone. So, sustainability of Gilt yields at elevated levels is long term pain both for the Government and the banking system. It is less said the better on the domestic cues with next round of rate-cut not at sight, if at all. The spike in bond yields in the US and Euro zone is major pain, ahead of FED preparation for start of rate-hike cycle. The only positive is the "carry", if funded out of Repo or CBLO counters, but valuation loss is scare in the absence of base at sight. So, it is one-way supply driven state and 10Y above 7.88-7.90% (old above 8.10-8.15%) will lead to more downside pressure. All combined, the focus was shifted at 7.85-8.0% (7.72% 2025) in alignment with US 10Y at 2.35-2.50/2.65%. What to be done now? MARKET PULSE urged institutional investors (including Banks) to cut portfolio duration ahead of 2nd June monetary policy. The strategy was to exit long bonds at 10Y yield 7.62-7.65% and buy 1-3Y to play the evolving upward slopping yield curve. Now, it is good time to reverse the play - reinstating the long book at 7.90-8.0% (old at 8.10-8.20%), funding the 1-3Y book from Repo/CBLO. For traders with deep pockets, it is good entry on 7.72% 2025 at 7.90-8.0% (with stop at 8.02%). It is possible that RBI may not like to supply fresh stocks at cost above 8.0%. All taken, the tone is bearish, the mood is nervous, reversal from 7.62-7.65% into 7.90-8.0% is stretched, hence it is value-buy for big boys and institutional investors.

Rupee under pressure, but supported by RBI - how long?

USD/INR has already formed firm base at 63.45-63.70 post bullish pick-up from 61.65-62.15 to 64.20-64.35. Since then, the trading range is "fixed" at 63.70/63.80-64.20/64.30 in alignment with end June'15 $ at 63.85/64.00-64.50/64.65 and 12M $ at 67.95-68.20-68.70/68.95 - importers (and RBI) on the $ bid at lower end, and exporters (and RBI) on the $ offer at higher end. The administered price-stability is seen to be in the interest of all stakeholders. What next? The near term outlook is Rupee bearish driven by weak domestic asset markets, spike in US & Euro zone yields and DXY in bullish consolidation - all combined have set up importer's fear and exporter's greed syndrome in anticipation of short term shift in trading focus into 64.50-66.50, within rest of 2015 big picture at 63-68. The spot trading focus is now seen in traction with end June'15 $ resistance at 64.50-64.65 and end July'15 $ support at 64.35-64.50. Combination of the two will provide near term spot stability at 63.80/63.95-64.35/64.50, with RBI on both sides to ensure Rupee competitiveness to exports and sustainable FDI flows and to build $ reserves before flows dry up. Short term bias is for sustainability of $ bullish momentum into 64.85-65.00; beyond here, stay neutral on directional bias either into 63.50-63.65 or 66.35-66.50. Based on the set hedging strategy, importers are already covered in end June'15 at 63.95-64.00 and 12M $ at 67.95-68.10. Now, it is good to buy end July'15 $ at 64.35-64.50. On the other side, exporters were asked to unwind June'15 cover entry of 64.50 at 63.95, which is done on Rupee recovery into 63.75. Now, good to reinstate June'15 cover at 64.50-64.65, cover end July'15 at 64.85-65.00 and await 12M $ spike into 69.35-69.50 to cover long term receivables.

EUR/INR is steady at upper-half of set big picture focus at 65.50/65.75-73.00/73.25 (at 69/69.25-73.00/73.25). Post the 65.66 to 73.15 rally, the pair is in back-and-forth mode at 69.20 to 72.93, and now locked at zoom-in focus range of 70/70.50-72.50/73. What next, Given the near term stability in EUR/USD at 1.10/1.1050-1.1350/1.14 against USD/INR play at 63.80/63.95-64.35/64.50, EUR/INR seen in sideways mode at 71/71.25-72.50/72.75 with break out bias into 73.00-73.25. At this stage, there is no clarity to set short term bias beyond 69.00/69.25-73.00/73.25.

Have a great week ahead; Good luck!

Moses Harding

What next in Currency markets?

Extended consolidation phase against mixed cues

Global cues continue to stay mixed! US economic data do not provide clarity on FED start of rate-hike cycle, post the expectation shift from June-September 2015 to October-December 2015. In the meanwhile ECB front loaded QE against mood-swings on Greece default. Both combined, DXY shifted trading focus from 96.50-100 to 93-96.50 (and EUR/USD from 1.0450/1.05-1.10/1.1050 to 1.08/1.0850-1.14/1.15). The squeeze in US-Euro zone yield differential also came in favour of the Euro for switch-over of investments from US to Euro zone. There is better clarity ahead now. FED may not delay start of rate hike cycle beyond Q4/2015 despite plea from IMF for deferral into 2016. All cues taken, USD Index short term big-picture is not beyond 93/93.50-100/100.50 with most trades at 94.50-98.00 in sideways mode.

EUR/USD is seen to have established near term stability at 1.07/1.0850-1.1350/1.15 against limited clarity to set breakout bias either-way (into 1.05 or 1.18). For the week, prefer sideways trading mode at inner-ring of 1.08/1.0950-1.1250/1.14.

USD/JPY held above 123.65 to hit 125.65-125.90 target with high at 125.85 before firm weekly close at 125.61. The intra-May bullish chase from 118-118.50 is closed at 125.50-126. What next? Retain bullish undertone while above 123.65-124.15 for 129-135.

Rupee continue to stay in administered consolidation mode

USD/INR is in consolidation mode at 63.45/63.60-64.20/64.35, since lift of base from 61.65-62.15. It has held thrice at lower end and twice at the higher end before close at 63.75, thanks to RBI's firm presence at either end. Spot #Rupee moves have been in perfect traction with end June'15 $ at 63.85/64-64.50/64.65 and 12M $ at 67.75/68-68.75/64.00 in back-and-forth mode. What next?

The short term outlook is not in favour of Rupee, driven by weak domestic cues and uncertain external cues. It is possible that demand-supply dynamics may shift from RBI $ buy mode to $ sell mode to protect Rupee weakness beyond recent low of 64.28, and to prevent extended Rupee weakness into 64.65-65.00. The hedging strategy is retained to buy end June'15 $ at 63.85-64.00 and 12M $ at 67.85-68.10, while exporters cover June'15 $ at 64.50-64.65 and await spot shift to 63.85/64-64.85/65 for cover beyond June'15 (12M $ into 69-69.50). For now, retain focus at 63.60/63.75-64.20/64.35 while preparing for short term range focus shift to 63.85/64.00-64.70/64.85, adjusting for time decay.

EUR/INR traded to the script, back-and-forth at 69.00/69.25-73.00/73.25 before close of week at 70.85. While there is better clarity on short term range (not beyond 68/68.50-73/73.50), the volatility is high against mixed cues in EUR/USD (within 1.08-1.14) and bullish momentum in USD/INR (into higher end of 63.60-64.60). For now, let us retain zoom-in focus at 69.50-72.50 in sideways mode.

Have a great week ahead; Good luck!

Moses Harding

What next in India Gilts market?

Bullish momentum done for shift to bearish consolidation

India (old) 10Y benchmark bond 8.40% 2024 bullish momentum from over 8.65% got completed at 7.50-7.65% before push back to 8.0-8.02%. So is the new benchmark 7.72% 2025 which lost steam at 7.62-7.65% for reversal into 7.80-7.82%. The two main triggers are from squeeze in India-US 10Y yield-spread from over 6% to below 5.5% and higher probability of extended rate pause period through FY16. Given this operating dynamics, appetite for FY16 RBI bond supplies (to fund Government market borrowing schedule) will be low, when Banks are already to the limit on excess SLR looking for exit options, waiting in hope for RBI OMO bond purchases.

The guidance from 2nd June monetary policy is not positive. RBI is back at its balancing act to support growth momentum at 7.5-8.0% (against FY16 target of 7.6%) and cut inflationary pressure into 5.5-6.0% (against January 2016 target at 6%). Both combined, RBI has no bandwidth to cut rates till CPI target is reviewed below 5.5%. Till then, need to be prepared for rate-pause till end September 2015. Beyond here, CPI trend and FED rate hike stance will set the tone for way forward. So, it is safe to assume that Repo rate at 7.25% is there to stay through FY16, while staying prepared for surprise 25 bps cut in the unlikely event of soft CPI at/below 5% by September (before kick-in of base effect impact) and delay in FED rate-hike shift to Q1/2016. At this stage, keep expectation of 50 bps rate and/or CRR cut out of focus.

What next this week?

Given the strong headwinds from both domestic and external sectors, the short term outlook is not positive. US 10Y yield has already shifted trading range from 1.85-2.35% to 2.15-2.65%, and resultant squeeze in 10Y India-US yield-spread below 5.5% will cut FPI appetite against limited comfort on Rupee stability. It is less said the better on appetite of domestic investors. Both combined, the way forward is not bullish on the Gilts.

10Y bond 7.72% 2025 is seen in bearish undertone at 7.72/7.75-7.82/7.85% (8.40% 2024 at 7.92/7.95-8.02/8.05%). While 7.80-7.85% (old at 8.0-8.05%) seen as value-buy zone, it is not safe to hold at 7.72-7.75% (and 7.92-7.95%), given the risk of stretch into/beyond 7.85% (and 8.05%) on US 10Y yield stability at 2.40-2.65%. So, it is prudent to trade end to end of 7.75-8.05% (and 7.95-8.05%), rather than holding on to value-buy, given the low probability of gains beyond 7.72-7.75%; possible that 7.72% 2025 may not get into premium (yield below 7.72%) through FY16.

It is not good for India to lose investor appetite, which would increase the borrowing cost of the Government and pressure on fiscal deficit. It is unfortunate that RBI has limited bandwidth to go for the rescue. There are also noises from highly leveraged borrowers to cut rates, but it would be better for them to cut debt exposure to make liquidity available for incremental capacity-build.

Have a great week ahead; Good luck!

Moses Harding

Interview with NDTV Profit - 2nd June 2015

Link:- http://profit.ndtv.com/videos/news/video-higher-probability-of-rate-hike-from-now-on-than-cut-moses-harding-369705

What next in India Equity markets?

Unwind of India euphoria premium in the absence of optimism on the way forward

Indian equity markets witnessed 3-step bull-rally since August 2013, since Raghuram Rajan took command at RBI. The first step was between August 2013 to May 2014, when NIFTY moved up from 5100 to 6600 by 30% (Bank NIFTY up from 8350 to 12800, up by over 50%). The second step was between May 2014 to mid December 2014, when Narendra Modi took charge of the new Government pushing NIFTY from 6600 to 7950 by over 20% (Bank NIFTY from 12800 to 18550 by over 45%). The third step was largely FPI driven building euphoria from Euro zone QE, RBI into rate-cut cycle, and Narendra Modi in over-drive mode on economic development and inclusive prosperity. The third step between mid December 2014 to first week of March 2015 saw NIFTY up from 7950 to 9100 by 15% and Bank NIFTY up from 18550 into 20500-21000 by over 13%.

What went wrong there? By then, RBI had delivered 2 rounds of rate cut bringing Repo rate down from 8% to 7.5%. It was seen that valuation-build from August 2013 to 1st week of March 2015 was dream come true; hence too hot to hold, against high risks from future corporate earnings not supporting the stretched valuation against high base effect coming into play. It was making sense to take profit off the table when SENSEX above 30000, NIFTY over 9100 and Bank NIFTY above 20500. It was also seen that Modi Government struggled to push through policy measures against political resistance, without enough support in the Rajya Sabha. By then, Brent Crude also regained steam with recovery by 50% from $45 to $65. Despite macroeconomic fundamentals shaping well, high valuation (not expected to be supported by corporate earnings growth) was not seen as low risk - high reward entry for fresh investments. So, given the combination of profit-booking urge and low fresh appetite at peak valuation, reversal from there was not surprise. The surprise is from the extent & speed of reversal and roller-coaster volatility between 1st week of March 2015 to now. In matter of 3 months, NIFTY unwound the mid December 2014 to 1st week of March 2015 rally for push back from 9119 to 7997 (against 19/12/14 low of 7961). Bank NIFTY suffered bigger damage for push back from 20500-21000 to 17246 (much below 19/12/14 low of 18563). Having unwound the third step euphoria rally into set cheap to acquire zone of 7965-8000 (and 17200-17350), it has been back-and-forth at 7950/8000-8465/8500 (17200/17350-18700/18850) pre & post 2nd June monetary policy review. The push-down from higher end was again after delivery of 25 bps rate cut, against downside risks on growth and inflation. The relief from post-policy low of 8056 is shallow at 8165-8190 with close now at 8114; so is BNF from 17469 to 17750-17800 with close at 17549. The complete unwind of the 3rd leg of the rally is indeed a big worry for investors and serious concerns for powers that be! All taken, the reversal was from combination of absence of tailwind support from global cues and dilution of euphoria in domestic optimism, building downside risks on growth and inflation.

More downside possible till optimism sets in by Q3/Q4 FY16

Global cues have already shifted from favourable to neutral mode, and may turn against going forward; spike in US/Euro zone Treasury yields and bearish consolidation in global equity markets are showing signs of shift to investor risk-off mode. DJI intra-2015 recovery from 17000 lost steam at resistance zone of 18350-18500 and US 10Y yield sharply up from 1.65-1.80% to 2.35-2.50%. The same is reflected in bearish consolidation in Brent Crude at $60-70 and Gold weak at 1145/1170-1210/1235 despite risk-off stance. Cash is seen to be the king in the absence of steam for early US economic recovery and mood-swings in the Euro zone over Greece and economic stability. While all these global events should ideally lead to higher appetite for India, huge opportunity loss for FPI investors since March 2015 (NIFTY down from 9000 to 8000, 10Y bond yield up from 7.60% to 8.0% against Rupee depreciation from 61.65-62.15 to 63.70-64.20) will keep there appetite neutral in wait-and-watch mode.

There are no major reasons to turn negative on domestic cues despite downward revision in FY16 GDP growth target at 7.6% (from 7.8%) and upward revision in January 2016 CPI target at 6.0% (from 5.8%). The growth pressures are largely from delay in economic capacity-build, leading to dilution in investor confidence and consumer sentiments, while inflation concerns are from suspect monsoon and lack of clarity on Brent Crude price direction within $50-85. There is better comfort on twin deficits, though.

Both combined, there are two options ahead in the short term, till end of Q3/2015. One, extended stability in NIFTY at 7965/8000-8465/8500 (Bank NIFTY at 17200/17300-18750/18850) and the other option is for extended bearish undertone at 7565/7600-8265/8300 (16150/16250-17950/18050). Both combined, near term cap is seen firm in NIFTY at 8265-8300 and Bank NIFTY at 17950-18050, break here will lead to change of outlook for bullish momentum into 8465-8500 (and 18700-18850). Beyond here, need RBI rate cut (on or before October review) to shift focus back at 8850-9150 (and 19750-20500).

What Next this week?

Retain NIFTY focus at 7965/8000-8265/8300 (Bank NIFTY at 17000/17100-17950/18050) and stay neutral on break-out either way. The best way is to play end to end with stop (and reverse) on break-out, pulling focus to either 7500-7600 (16000-16250) or 8400-8500 (18600-18850).

The external impact will be from bearish consolidation in DJIA at 17350-18350 and stability in US 10Y at 2.25-2.50/2.65% with pressure into higher end, as stakeholders await to get clarity on start of FED rate hike cycle which is seen to be in Q4/2015. The domestic cues are mixed, and data dependent for clarity on RBI monetary policy stance ahead. At this stage, expectation is for rate pause till end of Q3/2015. By then, if RBI review the CPI outlook from 6% to 5.5%, there is possibility of 25 bps rate cut in October review. If CPI outlook stays high at 5.5-6.0%, then it would be an extended rate pause with risk of hike dependent on FED stance. All taken, the way ahead is not clear, hence prudent to stay light and fleet-footed with neutral bias on range break-out. The possibility of 25 bps rate cut in October or extended pause through FY16 will retain stability in NIFTY at 7800/7950-8450/8600 till October monetary policy review, before shifting focus to either 7500-7600 or 9000-9150.

Have a great week ahead; Good luck!

Moses Harding

Narendra Modi encounters strong headwinds on economic prosperity agenda!

High on intent, but path ahead is steep up-hill

Narendra Modi and his team in the Government are indeed on over-drive mode to script turnaround in economic stability, which would lead to inclusive social prosperity. The first task of establishing clean (and efficient) Government and shake-up of executive (and administrative) machinery is seen to be done. Modi has established good "connect" with State Governments (and like-minded opposition political parties) to solicit their support in his initiatives, and also attracted overseas stakeholders to support (and participate) in the Indian long term economic growth agenda, through investment and consumption (of India goods and services to build exports). The strategy to build economic scale through large scale capital infusion for infrastructure, and to upscale growth in agriculture and manufacturing sectors are obvious steps in the right direction. All-out efforts to eradicate black money (and below the line economic activities) to cut revenue pilferage are measures not thought of before, which would plug leakages for better efficiency. The financial inclusion agenda to establish last-mile connect with the rural poor is laudable action, despite being done after 68 years into Independence. All these have generated internal confidence and external interests on India, making India look different to what it was a year before! Thus far, it is great start to make the World turn into India!

The hurdles ahead for Modi are many and tough, not to mention of the political resistance that the Government is facing to make things put to effective work. It is not surprise, given the hard fact that it would take years to have NDA majority in the Rajya Sabha. Opposition political parties not in support to sensitive (and crucial) measures for India development is the disguise of the Indian democracy. Let me not get into this, accepting the reality that political maturity (post electoral mandate) for common cause of "people welfare" is yet to evolve, taking lessons from the West and developed countries. The critical issues are related to capacity building to expand consumption, and to attract fresh capital to set pace for the growth engine.

Domestic woes continue to stay irritant to slow down the pace of execution of intent

The financial system, which need to supply fuel to the growth engine is in disorder; systemic important PSU banks are struggling for capital against NPA woes and earnings pressure. While domestic investment appetite is low, lenders continue to stay in risk-off (and aversion) mode. While balance sheet liquidity is available in plenty (with huge amount of investments in risk-off Gilts and AAA borrowers), opportunities are few as of now. It is positive that foreign investor appetite is in plenty. India is in their investment radar, which was not there a year ago! The Government need to think out of the box to provide relief to the existing unproductive credit stock, and create incremental capacity to pull fresh investment. The role of the Government through public sector investment (and financial intermediation) entities will be critical, to create private and foreign investor participation.

Macroeconomic fundamentals have turned the corner, and the worst is behind. But the best is not yet at sight. Given the investment - capacity creation - consumption conflicts in play, FY16 GDP growth may fall short of 8.0-8.5% target with most expectations around 7.5-7.8%. While inflation fears are behind (CPI inflation down from over 10% to below 5%), the short term outlook is not good with downside risks into higher end of 4-6% tolerance zone. This would mean that monetary policy support from here on will be tough to come by! It is fortunate that twin-deficits are no more threat to growth. FY16 fiscal deficit will exceed set target of 3.9%, while CAD is expected to be in comfort zone at 1-2% of GDP.

All combined, risks to NaMo economic upliftment agenda are from (a) clean-up of financial intermediation engine to support leverage of equity (b) revive domestic investor appetite from risk-aversion to risk-support (c) open up incremental opportunities to attract fresh investments from foreign investors (d) divert public monies from risk-off investments to risk-on growth supportive credit (e) fall-back supply side measures to arrest inflationary pressures from global cues and from acts beyond control (f) expansion of economic capacity through aggressive measures around infrastructure, manufacturing and agriculture sectors (g) diversify capacity expansion taking the opportunities to where lower end of the pyramid reside for geographical expansion of the economy and (h) top-up financial inclusion agenda with economic, monetary and technology inclusion for permanent relief.

Political maturity is the catalyst for quick turnaround

India success story can't be executed by the Government alone. It would need the support of all stakeholders. The script is written well and the execution engine is ready to pick up speed. All it would need now is the collective participation of all political parties to stay catalyst to the process, and not being irritant to slow down the pace. The present political thought process of the opposition parties should change from "you win - I lose" to "we win - people gain"! This change of mind-set will make India the best place to do business.

Good luck, Mr. Modi. ..hope for the best!

Moses Harding

RBI delivers bitter-coated sweet pills!

Delivered to expectation but chose the wrong choice

MARKET PULSE ruled out 50 bps rate cut and CRR cut, and the choice was between 25 bps rate cut (with hawkish guidance) or rate pause (with neutral to positive guidance). It was seen good to get optimistic guidance, if not dovish (instead of rate cut + nervous pessimistic guidance) to retain post-policy price-stability in neutral undertone. But, it turned out to be shocker of a delivery!

It was evident that RBI was finding it difficult to defend rate cut against shift of January 2016 CPI target from 5.8% to 6.0%. Governor also defended that rate action was not from any kind of pressure from "powers that be", and chose to back it up from building downside risk in FY16 growth target from 7.8% to 7.6%. If both are to be read together, rate pause would have been a better option having delivered 50 bps cut in Q1/2015. RBI also had the option to push overnight call money rate from 7.75% to 7.50% through removal of refinance restrictions at Repo counter; current restrictions do cause volatility between Repo-MSF corridor. Given the huge excess SLR in the banking system, higher refinance entitlement would have provided call money rate stability around Repo rate. Now, call money rate would stabilise at 7.25-8.25% (with most trades around 7.50%, down from 7.75%), which could have been achieved with higher entitlement on overnight at 1-2% of NDTL.  Believe, a scarce ammunition of policy rate cut is wasted when more is not in pipeline!

Would this rate cut come in support of growth? No, when bottlenecks are not interest rate sensitive. Why? Liquidity in the system is in plenty when RBI in $ buy mode and Banks holding 6-8% of excess SLR portfolio. Cost of liquidity is low for good credit, while high risk and highly leveraged borrowers are feeling the heat, whom can't be helped by RBI. Growth outlook is trending down from economic policy sensitive sectors, while interest rate sensitive sectors are not doing bad. The corporate earnings pressure can't be attributed to high interest expenses, when capacity utilisation is sub-optimal and margin efficiency is poor. The investment and consumption pick-up (to drive efficiency) has to be lead by policy measures and public investments and RBI supportive monetary policy can only be an enabling catalyst. So, Government should put pressure through actions and not by words, if at all. All taken, it is pity that the RBI Governor is made to "reverse-walk the talk", delivering 25 bps rate cut after highlighting cues that do not support rate cut!

What next? Extended pause or risk of rate hike!

Now, the way ahead is clear building three possible options based on RBI's CPI outlook of 6%: 25 bps rate cut on trend-down to 5%, extended pause into 2015 on trend down to 5.5% and 25 bps hike if 6% scare turns out to be real. It is common sense that 25 bps cut in 2015 is near-zero possibility as cues driving downside risks are more. The obvious choice therefore is extended pause through rest of 2015 and prepare for rate move either-way in Q1/2016, by when FED would have raised rates by 50 bps. All taken, outlook for rest of 2015 is not positive to keep financial markets in bearish consolidation undertone.

Way ahead for financial markets

Will FPIs stay put to absorb short term pains, when timing of shift to long term gains is not clear?

Equity markets is already into bearish undertone; NIFTY at risk into lower end of 7950/8000-8350/8400 and Bank NIFTY at 17200/17350-18200/18350. Need to stay neutral on hold at 7950-8000 (and 17200-17350), not ruling out deeper reversal into 7500 (and 16000) before long term strategic investment appetite kick in.

10Y benchmark 7.72% 2025 will come under pressure from regular pipeline supply against low investor appetite. The base is already up from 7.62-7.65% to 7.70-7.72% with minimum downside target at 7.80-7.85%; if US 10Y yield moves up into higher end of 2.10-2.35% against India-US yield spread comfort zone at 5.50-5.65%, pain will be more.

Rupee will be under pressure from import lead - export lag play against risk of FPI exit and bullish consolidation in USD Index at 95/96.50-98.50/100 before bullish pick-up beyond 100. All taken, MARKET PULSE already shifted base from 61.65-62.15 to 62.95-63.45 with end June'15 $ stability at 64.00-64.50 and 12M $ hold at 68 for rally into 69-70. All taken, USD/INR spot focus trading range is set at 63.45/63.70-64.60/64.85, and thereafter into consolidation mode at 64-66.

Cash is the king till Q3/2015, awaiting fresh cues to trigger investments or for extended stay in cash!

Moses Harding