Global Markets : Post the weak monthly close, What Next? Read on...

Markets play tunes to Central Banks actions and expectations

RBI gave solid push to India Financial markets through overdose steroid of 50 bps rate cut, which drove the markets up from 29th September cutting the pent-up bearish undertone. What followed thereafter from other Central Banks put halt to the rate cut driven euphoria; delivery of rate & reserve ratio cut by PBoC sent nervous signals to dilute the bullish momentum, and into down-hill momentum post FED signals of possible December rate-hike, against expectation build up for delay into 2016. During this phase through October, Global markets stayed in mixed undertone between risk-on and risk-neutral mode. DJIA posted solid recovery before stability below strategic resist zone of 17850-18350; US 10Y yield up from 1.95-2.0% to 2.15-2.20%; USD Index DXY up from 92-93.50 to 96.50-98 driving EUR/USD down from 1.15-1.1650 to 1.0850-1.10 and Gold unwound the rally from 1100-1110 to 1185-1200 with push back into 1135-1150. Brent Crude continue find support at set strategic buy zone of 42.50-47.50 for consolidation at 47.50-50.

NIFTY post-policy recovery held at 8300-8350 strategic resist zone for weak close at 8035-8085, while Bank NIFTY under performed with sharp unwind from over 18000 for close below 17400. With most cues neutral, Rupee built traction with DXY recovery for unwind of recent recovery from 66.35-66.50 to 64.65-64.70 with close at intermediate support zone of 65.20-65.35. 10Y bond yield is the worst hit with sharp unwind from 7.45 for close at strategic support zone of 7.63-7.65%. Rupee continue to retain its strength against Euro with swift rally from over 75 to below 71 before stability at intermediate zone of 71.65-72.15.

India equity market sentiment stay low against near term uncertainties

MARKET PULSE strategic focus on NIFTY for rest of 2015 was set at 7500/7650-8350/8500; breakout bias (ahead of 29th September RBI policy review) was set for 7000-7300, taking 8850-9150 off the radar for FY16. Thanks to RBI 50 bps rate cut, extension to 7000-7300 was averted for recovery into 8200-8350. Bank NIFTY big-picture focus was set 15350/15500-18350/18500 with post-policy review at 16500/16850-18100/18350. NIFTY weekly/monthly close at 8035-8085 (Bank NIFTY at 17250-17400) on reversal from 8335-8350 (18000-18050) is not positive take-away into the new week/month.

There is no clarity on the global cues; growth worries remain with bit of comfort from the US and China. There will be clarity from pipeline US economic data on possible FED December rate hike, which is 50% probability now. Will continue to watch DJIA at 16850-18350, upper-half of set 2015 strategic focus range of 14850/15350-17850/18350. DJIA building steam into 17850-18350 will be immediate relief for India equity market. Attention will be more on domestic cues watching Bihar election results, which is in any case not make-or-break event. Given mixed cues and lack of clarity, it is good to stay with set post-policy NIFTY focus at 7950/8000-8300/8350 (Bank Nifty at 16850/17000-17850/18000) retaining neutral breakout bias between 7650 and 8650 (15850 and 19000). The strategy is to play end to end  with stop and reverse on sustainable breakout eitherway on daily closing basis (Watch daily update for execution guidance).

India 10Y bond under pressure with all positive cues behind

10Y bond rally into 7.45-7.50% couldn't sustain for swift reversal into 7.60-7.65%; this move was no surprise having set long unwind target at 7.50% and await correction to 7.60-7.65% for reinstatement of investment book. Now, close at 7.63-7.65% has unwound most of the unexpected extra 25 bps cut! What next? There's more bad news ahead. While no more rate cut from RBI in rest of FY16, probability of 50 bps hike by FED during this period is high. This would set up US 10Y stability at 2.35-2.50%. If India 10Y bond to stay steady at 7.50-7.65%, yield spread squeeze at 5.10-5.25% should emerge sustainable only through stability of CPI inflation at 4-5% in 2016, which is low probability event. The liquidity dynamics will stay in favour of more of supply than demand. Most Banks and non-Bank investors continue to hold "long book" and turned "overweight" post-policy without taking money off the table at 7.45-7.50%. The only comfort is from RBI appetite at 7.65-7.75% (absorbing 90-100 bps time value premium over the operating Repo rate). It also may not look good on RBI to allow 10Y yield back into 7.65-7.75% (at 5.50-5.55% spread against pre-FED rate hike range of 2.10-2.20%) post delivery of 50 bps rate cut, which may then look like an act in haste. All taken, recovery into 7.45-7.50% in rest of FY16 is low probability, unless FED reverse its stance shifting rate hike action beyond Q1/2016. The risk is high for stretch weakness beyond 7.60-7.65% on spike US 10Y beyond 2.15-2.20%. For now, prefer stability at 7.60/7.62-7.65/7.67% with good long unwind (and duration cut) appetite at lower end and RBI bids at higher end to arrest 7.72% 2025 Bond value going below par into discount.

Rupee under pressure from external cues

Rupee (post-policy) swift recovery from 66.35-66.50 ended at 64.70-64.85, seen as RBI $ buy zone, importer's near term hedge zone and strategic trader's 12M $ short-squeeze & long initiation at 68.75-69 for completion of the chase from 71-71.50. The USD recovery from 64.70-64.85 finds resistance at exporter's near term cover zone of 65.35-65.50. What Next? USD/INR close at 65.20-65.35 is bullish while DXY stays firm at 96.50-98.00 (EUR/USD at 1 09-1.1050). FII appetite is also seen diluted post FOMC, thus cutting down exporter $ supply in the forward market. While Rupee has solid medium-long term comfort from steady CAD and robust FDI/ECB flows, near/short term prospects continue to stay weak and uncertain. The long term comfort sets up solid support for Rupee at 66.50-66.85 (12M USD/INR at 70.75-71.25), while near term uncertainty (which may emerge sudden and swift) make it prudent to unwind short USD/INR exposures at 64.50-64.85 (12M at 68.75-69). For now, big-picture range for rest of 2015 is not seen beyond 64.50/64.85-66.50/66.85 with near term zoom-in focus at 64.70/64.85-65.55/65.70. Given the RBI $ appetite at lower end against reduced FPI flows, do not rule out shifting play to 65.20/65.35-66.35/66.50 on DXY shifting play from 96.50-98 to 97.50-100.50 (EUR/USD from 1.09-1.1050 to 1.0650-1.0950). The relief (into 64.85-65.20) is from DXY into correction/unwind phase into 95-96.50 (EUR/USD at 1.1050-1.12), seen as low probability in the near term. It is tight rope walk, hence prudent to avoid being overweight on risk. For the week, good to stay tuned at 64.95/65.10-65.55/65.70 and prefer RBI presence both ways to restore price stability till FED rate action.

EUR/INR now around mid-point of set big-picture focus at 68.65/69.15-74.65/75.10. As expected, stretch below 71.90 held at 70.85-71.00 before consolidation at 71.65-72.15. What Next? EUR/USD bullish momentum into/beyond 71.90-72.15 may not sustain with focus now tuned at 68.65/69.15-71.90/72.40 with bias into lower end.

Have a great week ahead; Good luck!

Moses Harding

Is the liquidity driven euphoria over for risk-on assets? Read on...

Markets losing steam on the Central Banks triggered relief rally

FED and RBI triggered rally helped to cut the pent-up bearish undertone driving risk-on assets up for possible set up of 2015 low. The worry however is from lack of confidence (and steam) for extension towards 2015 high's in the absence of fundamental triggers. There are signals that dovish monetary policy (excess liquidity and low interest rates) driven rally is in struggle to expand the asset bubble beyond a point on fear of sudden burst, thus pulling in long-unwind and short-build.

FED and RBI didn't "walk the talk" to stay in support of risk-on assets. While FED is seen to be under pressure from G7/G20 countries (and the IMF) to defer rate-hike action, RBI was seen to take the "monkey of its back" by delivering overdose rate cut. The benchmarks set by FED (on Growth, Unemployment and inflation) for shift into rate hike cycle are in favourable trend, and most built rate hike in Q4/2015. But now signals are visible for extended FED rate pause mode, pushing the rate hike expectation to mid 2016. On the other hand, RBI was vocal on lack of long term comfort on inflation and the need to protect "silent savers" from "vocal borrowers". The 50 bps rate cut on 29th September came as a very pleasant surprise.

The risk-on assets have mostly factored the liquidity driven tailwind, and now the focus is on the macroeconomic fundamentals and timing of the end of ultra-accomodative monetary policy stance of major Central Banks. While it is believed that the worst is behind, the pace of growth recovery is not clear. The strategy ahead has to be built on the assumption that by end of 2016 (or early 2017), liquidity triggered rally would shift to fundamentals driven bullish momentum in 2017, which means that risk-on assets would stay volatile for rest of 2015 and through 2016 without establishing clear trend eitherway. It is great opportunity for traders, and quick return for investors if focus is retained not beyond 3-6 months.

Risk-on equity assets in sideways and at reduced volatility mode

Sentiment on G7 equity markets is not positive over long term and neutral in the short term at current value. DJIA posting new 2015 high over 18350 is sub 50% probability, so is breakdown below 15350 with intermediate support at 16850. The preferred short term scenario is for sideways mode at 16850-18350. Beyond here into 2016, it is high probability for 2015 low staying safe for punch of 2016 high above 18350. The support is also from US 10Y Treasury yield hold at lower end of 2.0-2.5% comfort zone considering 50 bps rate hike in 2016.

India domestic cues remain positive across most parameters supported by Government policy (and executive) actions, RBI monetary policy support, low Brent Crude at 42.50-52.50 and Rupee price stability at 64-67. India will continue to enjoy tailwind support from external cues. FII appetite for India debt is huge and long term appetite is adequate. FDI flows have gained pace with frequent news flow of ticket size of over $100 mio. ECB appetite is good from both sides for long term foreign currency borrowings, while offshore lenders more keen than before to lend long term Rupees. MARKET PULSE was highlighting the possibility of shift of operating Rate from Repo to R/R rate retaining LAF at 6-7% for gradual decline below 7% to 6%. RBI is seen to do this shift in baby-steps with operating policy rate now at 6.75%, with expectation for more towards long term stability target at 6%.

Nifty positive undertone retained while above 8085 (Bank Nifty above 16850-17000)

Nifty intra-2015 price movement began with posting of lower high's between March to August (from 9119 to 8530) followed by higher low's from September low of 7539 to 8088 before failure at 8336. So is Bank Nifty from 20907 to 18896 followed by recovery from 15762 to 17434 during the same time before failure above 18000. The said moves were more or less to expectation having set 2015 strategic focus not beyond 7500/7650-9000/9150 (15500/15850-20650/21000). What next? NIFTY recovery from 2015 low failed around mid-point of 8325 (Bank Nifty below 18250), and now need to hold above 8085 (16850-17000) to avoid set up of bearish momentum for 7950-8000 (16350-16500). There are no major cues to look for clarity beyond here, hence retain near term focus at 7950/8000-8300/8350 (16350/16500-18000/18150). Into short term, good to retain bullish bias into 8500-8550 (18350-18500). The strategic play is to stay end to end with stop on break.

India 10Y bond yield in sideways mode with most trigger points behind

Having completed the chase into 7.50% (from 7.65-8.0%) ahead of set time line, focus is now set at 7.50-7.65%, and do not see sustainable of overshoot eitherway. The traction is expected to be at 75-90 bps spread between 10Y bond yield and operating Repo rate and 5.50-5.60% with US 10Y Treasury yield at 2-2.10%. The short term strategy is to stay focused end to end and build medium term portfolio at 7.60-7.65% for next target 7.25-7.40 followed by 7.0-7.15%.

Rupee fortunes continue to remain in the hands of FII and RBI

Rupee recovery from September low of 66.86/66.41 is impressive, and now in sideways mode at 64.70-65.20 despite DXY rally from 92.50 to 97 during this time driving EUR/USD down from 1.15 to 1.10. What Next? Despite some irritants around, Rupee is holding firm on good FII/FDI flows and $ supply driven mode in the forward market and RBI holding fort at 64.70-64.85. The risk factor is from FII exit ahead of 2015 year end to cut leveraged investment and take money off the table to stay away during this uncertain correction phase. Another risk factor is from RBI to step up its $ purchases if DXY extends gain into/beyond 98.50-100 driving EUR/USD down into 1.05-1.0850. All combined, there is higher probability of USD/INR extending play into higher end of 64.70/64.85-65.70/65.85. The positive take-away is the shift of short term big-picture focus from 65.50-67 to 64.50-66 for rest of 2015. The hedge strategy remains unchanged - importers hedging near/short term exposures at lower end (64.50-64.85) and exporters covering near/short/medium term exposures at higher end (65.50-65.85) tracking 12M USD/INR at 68/68.25-70/70.25.

EUR/INR reversal from 74.65-75.15 (strategic resist cum sell zone) met 71.65-72.15 target, and now looks good for more into 69.65-70.15 ahead of 68.65-69.15. The strategic "sell-on-recovery" play is retained for now with trail stop at 72.25.

Moses Harding

Impact of new Payment and Small Finance Banks on Commercial Banks: unbiased analysis

Impact on low-cost liabilities, transaction fees and zero-cost float funds

Transaction Banking products have come into being post the technology-driven approach to Banking since 1994, led by new generation private sector banks and select few foreign banks. The agenda of Transaction Banking began with provision of "Anywhere Banking" services transforming the clients of a particular branch to the Bank, and extending further to all Banks through shared ATM network. The focus then moved on to seamless handling of "Payment and Receipts" to companies through "Cash Management" systems and technology, and now to all (including individuals) through Internet Banking and emergence of non-bank service providers who use Banks only for transaction facilitation with Current Account relationship. The threat to Banks are from two counts: (a) migration of Current Accounts of service providers to their own Payment Bank and (b) risk of retail client migration from Commercial Banks to special service Payment Banks.

The benefit from these developments are many to customers from combination of convenience and optimum use of funds plugging interest leakages. The instant money transfers is delight to the recipient for immediate use of funds, and relief to the remitter cutting the end to end lag time of the transaction. The details of the end to end flow is now available to customers on their Hand Phone through SMS alerts. All taken, Transaction Banking services and on-going improvisations have turned out to be customers delight (with monetary benefits) for small price. The resultant shift from usage of paper to Plastic money/Technology transfers is good for the financial system and the Government. The transaction fees paid for these services is seen as "value for money" by most customers.

The benefit for Banks is from combination of cost optimisation, by reducing "feet-on-branch" customers to ensure productive use of branch manpower from "service" to "cross-sell" and revenue maximisation  through fees and build-up of low cost CASA deposits. All combined, critical analysis of cost-benefit for Banks is not seen very favourable. With introduction of "sweep-in and sweep-out" time deposit facilities, no savvy clients maintain high balances in CASA accounts by moving funds from Term deposits on need basis. The concept of "float funds" has now become irrelevant. When the end to end transaction time was high, Banks enjoy the use of funds till the payment is credited to the beneficiaries. Now, the end to end transaction time is same day on most cases. If Banks evaluate the cost-benefit of their Transaction Banking products, it may become evident that the bottom-line impact will be insignificant. The pain however is from increased competition on liability products at lower end of the rate curve, at 0-4%.

Impact on high yield retain loan portfolio

Small Finance Banks build competition on loan products at higher end of the rate curve (from retail customers), at over 11%. Banks NIM strategy is from increase of high-yield retail portfolio. While wholesale portfolio provides not more than 1.5-2.0% spread, retail credit exposures are lucrative with spread of over 4% despite marginally higher cost of credit. It is also fact that managing retail credit stress is not difficult as corporate NPA management. The retail credit risk is well-spread and the impact is not severe. Small Finance Banks will reach out to these clients to compete with well established commercial banks. Can they succeed? Not in the short/medium term! Given the initial high cost of funds for new Small Finance Banks, it is difficult to compete on interest rate with existing players. The reach advantage may not be relevant as retail credit delivery gets extended on the technology-driven platform. All combined, impact on commercial banks from new SFBs may emerge as long term risk, and not as immediate threat!

What is RBI agenda on this strategy?

Most Commercial Banks have emerged  as full-service" holistic financial super market, handling products/services across retail to wholesale, high end to low end and plain-vanilla to exotic. The intent of RBI may be to create "specific focus" specialised Banks that could lead to larger coverage/client reach and better efficiency. To this effect, three specialised groups may emerge: (a) Small Finance Banks catering to small-ticket retail clients with focus on high risk - high yield credit products/services  (b) Payment Banks catering to retail category customers (individuals and small companies) with focus on low-cost non-credit products/services and (c) Wholesale Banks catering to SME/Large value clients across high end products with limited competition on specialised products around Cross-border business, Treasury and Global markets. If linkages could emerge through distribution (of others products/services) arrangement/relationship (including minority equity stake), then it would be win-win for all. It will lead to collaboration avoiding cut-throat competition. What about competition to NBFCs? It is possible that NBFCs role as step-down financial intermediaries, with source of funds from Banks will be at risk. NBFCs may need to work on reducing the high dependence on Banks to build their loan book.

So, entire client segment is now seen split into two parts - low value and high value, SFBs covering low value credit customers, Payment Banks covering low value non-credit customers and Commercial Banks focus on credit and non-credit products for high value large customers. The strategic vision and execution mode is seen to be good for the system and beneficial for end use customers.

Should commercial banks worry from this competition? Not at all!

There is no immediate threat on the bottom-line efficiency of commercial Banks in the medium term. It is couple of years away for them to emerge as risk. By this time, it is a great opportunity for Commercial Banks to expand its reach to Investment Banking products/services. Most boutique investment Banks tap into the client base of wholesale customers of commercial banks. The revenue from Investment Banking products/service are more efficient (cost-revenue ratio at sub 25%) than the revenue from Payment and Small Finance Banks. Therefore, risk from emergence of Payment and Small Banks is indeed on the NBFCs and boutique Investment Banks, and not on existing commercial banks.

Moses Harding

Global Markets gets short term relief support from FED rate-steady outlook...What Next?

Shift of FED rate action outlook from now to later provides relief

Post the shift of focus from China to the FED rate stance, global markets have been volatile in traction with swings in stakeholders expectation on the timing and quantum of rate hike, thus leading to wild moves since mid July 2015.

DJIA fell from set strategic resist zone of 18100-18350 (high at 18137) to value-buy zone of 14850-15350 (low of 15370) before swift recovery over intermediate zone of 16850-17100. During this period of July - October, US 10Y yield has traded back and forth at 1.95/2.0-2.30/2.35% focus zone. The end to end moves was from set up of bearish momentum on fear from September-October rate hike followed by relief from comfort that FED may stay rate-steady in 2015, while some vocal on possibility of QE4.

In the meantime, USD Index was in volatile mode at 92/93.50-97/98.50 (93.56 to 98.33 to 92.62 to 96.70) before sideways play at 93.50-95. In traction with DXY, Gold push-back from 1150-1165  resistance found support at 1100-1115 before bullish consolidation at 1150-1185.

All taken, investors (and traders) sentiment is positive from short term relief from rate-steady FED and long term risks from economic activity at sub-par level not ruling out extended rate-pause. On this outlook, risk-on assets will continue to enjoy monetary policy support (low rate - high liquidity regime) till stability of weak economic fundamentals (low growth - high unemployment rate). What Next?

Equity assets mixed between risk-on and risk-neutral mode

US is seen to be under pressure from G7 (and IMF) not to turn "black sheep" to be the "odd man out". It is also essential to protect G7 interests in the EM (and BRICS) markets. The start of rate hike cycle by the FED ahead of other G7 Central Banks is not seen favourable for developed and emerging markets. The resultant outlook shift from FED start of rate hike cycle from Q4/2015 to Q1/2016 is great relief. It is also possible that the quantum of rate hike in 2016 is restricted at 25-50 bps. This is "manna from heaven" set up for institutional investors to stay overweight on the "carry-trade" leveraged investment portfolio across developed and emerging markets. The short term outlook therefore is based on the assumption that FED rate hike is deferred to Q1/2016 with not more than 50 bps hike in 2016 to ensure that monetary dynamics stay in favour to support the growth supportive initiatives of the G7 Governments.

DJIA focus retained at 15000/15350-18000/18350 with most trades at upper-half at 16500/16650-18200/18350. There would be traders appetite at the lower end for chase into higher end for unwind. At this stage, it is seen as high risk to stay invested at 17850-18350. Believe that 2015 has already seen it's high at 18351 (in May) and low at 15370 (in August) for consolidation at 18350-18350 awaiting fresh breakout cues, mostly from the US economic data and G7 comfort on FED shift into monetary tightening mode.

US 10Y yield short term consolidation is firm at 1.90-2.40% covering 50 bps hike in 2016 with most trades at lower-half at 1.90-2.15% for rest of 2015 before shift to upper-half in Q1/2016. The strategy is to stay focused end to end of 1.90/1.95-2.10/2.15% for now.

DXY bullish momentum is diluted retaining firm undertone

DXY 2015 high of 100-100.35 (seen in March-April) is pushed out of the radar. Will the 2015 low at 90.24 be safe if rate hike expectation is deferred beyond Q1/2016? While retaining set strategic focus at 92/93.50-97/98.50, do not rule out breakdown into 90 while US Treasury yields stay down. The big-picture play is seen wide at 90/92.50-98/100.50, and good to build strategic "long" at lower end.

EUR/USD is volatile since July-August at 1.08-1.17, held firm at set 1.0850-1.10 strategic buy zone and couldn't hold on to gains above short-entry zone of 1.15-1.1650. It is tough to set bias for breakout of 1.10-1.15 zoom-in consolidation zone. The attention is on the economic data out of the US and Euro zone post the dilution of FED rate hike risk in Q4/2015. While 2015 low of 1.0456 (March) and 1.0519 (April) is seen safe, set rest of 2015 focus between 1.0808 (July low) and 1.1711 (August high) with most trades at 1.10-1.15.

USD/JPY in sideways mode of set focus range of 118-123 post the June-August swings at 115/116.50-125/126.50, seen good for 2015. For now, prefer consolidation at 116-121 and stay focused at end to end.

Commodities firm from weak USD and long term value-buy support

It is no surprise to see Brent Crude finding value-buy support at 42-45 and short-build interest at 52-55, given the short term consolidation at 45-55 with most trades around 50. There are no major triggers to review the set medium term focus at 40/42.50-52.50/55 with breakout bias into 55-70, upper-half of 40-70 big-picture focus.

Gold gained more out of the FED rate-steady outlook with solid recovery from 1100 and building steam for extension into 1200-1235 while above 1150. This would complete the full recovery of push back from below 1235 into 1070-1085  (strategic support zone) between May to July. Can the recovery get stretched beyond 1235 into 2015 high of 1306.20? It's 50:50 probability at this stage with trigger from DXY weakness beyond 90-92.50, seen as low probability event. For now, big-picture play seen restricted at 1115/1150-1200/1235.

Moses Harding

Whats Next in India markets with limited clarity on the trend? Read on...

Sentiment mixed on risk-on assets in the long term while good in the short run

India macroeconomic fundamentals are seen to be in sustainable recovery mode. There is better comfort on growth pick up in the busy season and beyond into 2016. Government is seen committed to it with firm support from RBI. There is no major concerns from inflation with greater comfort on the CPI against sub zero WPI at widened spread of over 8% between them. The risk from external sector stay diluted for now with signs of FED delaying the inevitable rate hikes into 2016. FIIs are already pumping in liquidity for leveraged "carry" play. Then, why India equity markets in struggle to establish sustainable bullish momentum? While shift of NIFTY focus from 7500-7650 to 8100-8250 (Bank Nifty from 15350-15850 to 17350-17850) is relief, the positive take-away is the cut of bearish momentum for risk below 7500 (15350) into 7100-7250 (14350-14750). All taken, short term (for rest of 2015 and FY16) relief is seen to be firm against mixed undertone beyond there! What Next?

India Equity market retain bullish consolidation

While away, Nifty held above set strategic support and buy zone of 7500-7650 (low at 7691 on 29/9) for recovery into 8100-8250. MARKET PULSE expectation was for punch of 2015 low in Q4/2015 before set up of medium term rally. Thanks to RBI liberal dose of 50 bps rate cut (and catalyst support from expectation of rate-steady FED), 2015 low is already punched at end of Q3/2014 at the doorstep of Q4. The near/short term outlook is positive, if not bullish. It is premature to pull 8850-9000/9150 into the radar, but July high of 8654 is pulled into focus, supported by huge FII appetite and low short term money market rates with more than adequate system liquidity. Except for take-profit long-unwind (for completion of chase from above 7650 to 8250), it is not prudent to "short" the market at this stage. For now, NIFTY short term focus is shifted to 8000/8150-8500/8650 with bias into higher end, retaining investors (and traders) sentiment in buy-dips mode.

Bank NIFTY held at 16500-16650 strategic support zone with low punch at 16648 on 29/9 for solid recovery into 17850-18000. While 2015 high of 20541/20907 is distant away, July high of 19229 is pulled into the radar. Going forward, Banks will benefit from significant difference between cost of outgoing and incoming deposits and m2m gains on the investment book. The pockets get deep to absorb NPA woes. For now, focus is set at 17150/17650-18650/19150 with bias into higher end in buy-dips mode.

India Bond market retain bullish mode looking for more from RBI and FII hunger from FED relief

India 10Y bond yield hit a low of 7.45% post 50 bps rate cut gift from RBI before consolidation at 7.50-7.60%. The support was also from US 10Y bond rally from 2.20-2.35% to 1.90-2.05% retaining the yield spread at comfort zone of 5.50-5.65%. While RBI 50 bps cut defies logic (post the pre-policy tough talk and most expectations of not beyond 25 bps cut), the intent of RR may be to take the "monkey off the back" by putting an end to rate cut noises around. In the process, "silent savers" have been put at the alter of sacrifice! Be that as it may, the short term appetite is huge with 75 bps "carry" between Repo/CBLO rate on the 10Y yield with limited downside risk not beyond 7.65%. Having said this, sky rocketing prices of food items and high probability of firm long term base of Brent Crude price at $42.50-47.50, structural risk on the CPI is not yet out of the way. Despite fundamentals not supporting stretch beyond 7.45-7.50% in the short term, sentiment and liquidity play will limit downside pressure.

MARKET PULSE was on the buy-mode from 7.90-8.05% for end of FY16 target 7.50%. RBI helped to get it ahead of time by end of mid FY16 for taking money off the table well ahead of time for much better return than anticipated. The focus now set at 7.45/7.50-7.60/7.65%. It is sub 50% probability for stretch beyond 7.45-7.50% in rest of 2015 and FY16, while 7.60-7.65% and beyond will be good to reinstate strategic book with tight stop at 7.75%. It will be period of consolidation with most trades at 7.50-7.60%, breakout trigger in traction with US 10Y range at 1.90-2.15% retaining yield spread at 5.50-5.65%. It is time to realise profit and act on breakout of 7.45-7.60%.

Rupee firm on external support from rate-steady FED and FII liquidity

From where we left USD/INR held above 65.50 (stop loss sell point) for pre-policy rally from 65.55 to 66.41 (high on 29/9) ahead of 66.50-66.85 strategic sell zone for exporters. The post-policy Rupee rally from 66.41 to 64.69 is sharp from combination of accelerated FII supply and RBI off the $ bid. The intent of RBI may be to avoid provision of cheap Rupees to FIIs, and instead provide the benefit to importers who were in panic mode post Rupee sudden push down from 63.35 to 66.85 in quick time. What next?

MARKET PULSE had set rest of 2015 USD/INR focus at 63/63.35-66.50/66.85 with 65.50 as the breakdown trigger point, and see no reasons to review this focus now. However, near term play has shifted from 65.10-66.85 to 63.35-65.10. In the longer end, 12M $ is down from upper-half to lower half of set 68-71 slicing through the 69.75-70 intermediate support zone. The export hedge strategy to absorb 70.50-71.50 has worked well, time decay premium being icing on the cake. It is unfortunate that Rupee valuation continues to stay in the hands of FII and RBI. When FII flows in plenty either-way, a go-slow RBI stance cause excessive appreciation or depreciation irrespective of economic fundamentals. Hence, the risk management strategy has to be more tuned to FII and RBI behaviour and sudden change of stance and/or mood-swings. For now, zoom-in focus is set at 64.60/64.70-65.10/65.20 with bias for extended Rupee strength into 64-64.10 against sub 50% probability for complete unwind of 63.35-66.85 move. On the longer end, 12M $ focus is set at 68/68.25-69.75/70 for hedge strategy.

EUR/INR nicely traded end to end of set strategic focus at 72.65/73-75.15/75.65 with push back from 75.67 held at 72.70 before up to 74.52. The cross-pair is relatively less volatile from combination of Rupee and Euro strength against the USD. What next? Given the bullish consolidation mode of Euro and firm Rupee in the short term, EUR/INR has firm resistance at 74.50-75.00 against solid short term support at 72.50-73. Good to stay focused end to end awaiting more cues for better clarity.

Have a great week ahead....Good luck!

Moses Harding

Manna from RBI and relief from FED keep markets in cheer!

RBI delivers "manna from heaven" post "hard talk"

It was a pleasant surprise to get 50 bps rate cut from RBI on 29th September, when the expectation was between 25 bps cut or rate pause. RBI did talk tough ahead of policy review date, in favour of "silent savers" and against the "vocal borrowers" retaining January - March 2016 CPI forecast at higher end of 5.5-6.0%. MARKET PULSE did highlight the possibility of aggressive monetary easing post the diktat to Banks to set the Base rate against incremental cost of short term sources of funds. The 50 bps rate cut (and resultant crash in short term cost of funds to 7.25-8.0% across 91-365 days) will drive Banks Base rate to median 9.5%. RBI pro-market rate action has indeed shifted the tone from bearish to bullish consolidation.

Sign of FED stay put on rate pause in 2015

The relief for risk-on assets is also from build up of hope of extended delay in start of rate hike cycle by FED into 2016. In the Indian context, risk of FII pull-out from India equity and debt markets has gone out of the radar. It is relief for Rupee as well with RBI off from the $ bid.

The combination of 50 bps rate cut from RBI against steady rate policy of FED is short term relief through rest of 2015.

Sentiment steady between risk-on and risk-neutral till FED rate move

The relief for NIFTY is from shifting focus from 7700-7950 to 7950-8200, while 10Y bond yield hit 7.50% (from 7.78-7.83% buy zone) retaining over 75 bps spread with operating policy rate. Rupee held at 66.10-66.20 for accelerated gains beyond 65.50 stop loss point for re-initiation of short-dollar book (or add-on to short-build initiated at 66-67), shifting focus to 64.50-66 to the relief of importers.

It is good to be back in India. Will revert soon with detailed analysis taking stock of the moves between 23rd September to today!

Moses Harding