India Financial markets : End of 2015 review

Equity market : A great start, but only to lose steam before mid-way

It was a glorious run in 2014 with Nifty up by over 30% and Bank Nifty by over 60%, but got fizzled out in Q1/2015 post Nifty stretch by another 10% and Bank Nifty by 11.5%. The 15 month rally in Nifty from end 2014 close of 6300 (Bank Nifty from 11400) lost steam at set hot-to-hold zone of 9000-9150 (NIFTY) and 20650-21000 (Bank Nifty) in the absence of execution triggers on India reform process. The reversal in Nifty (from March high at 9119) was steady and gradual into set cheap-to-acquire zone of 7500-7650 (September low at 7539) with intra-2015 correction by over 17%. Ditto was in Bank Nifty with sharper correction by over 24% into strategic support base at 15650-16000 (September low at 15762). Will Nifty regain steam now for 2015 close above 8282 for positive close in 2015? Bank Nifty 2014 close of 18736 is clearly out of focus for negative close in 2015.

On the short way ahead for rest of 2015, Nifty post 29th September 50 bps rate hike triggered high of 8336 (high on 30/10) is clearly out of sight. The hope at best is to conquer November high of 8116 for stability at 7750-8100 for move into 2016 with confidence for an improved performance. The cues ahead are not very encouraging. The external tailwind support is on the unwind and FPIs have no great appetite for risk-on India assets when other markets have turned relatively better than India. The domestic cues are nervous losing the built up optimism and euphoria, but retaining the hope for resolutions from reform-hungry Government. The domestic cues need to be strong to counter the FED monetary policy driven headwinds. The hope cues are from GST roll-out, resolutions around Banks NPA, making FDI entry smooth, increasing domestic investment & consumption through growth supportive monetary policy and geographical spread of economic activity for higher employment generation and wealth creation. It looks great on paper, but as always execution delay is the major irritant and bottleneck on the way ahead. For now given the lack of clarity either way, it is tough to set up direction bias for December when the participation is low making markets volatile in the absence of two-way liquidity. It is good to retain NIFTY focus at 7500/7650-8000/8150 with most trades expected to be around intermediate risk-neutral zone of 7750-7900.

Bank Nifty is supported only from growth optimism and resultant pick up in credit growth. Barring this, there are many hurdles on the way. Foremost is the NPA woes around most Banks; while some have the P&L and Capital bandwidth for resolutions, most suffer from the absence of these two critical muscles to get out of the NPA woes. It is less said the better on the revenue squeeze on Banks, except few new generation private sector banks. Banks have incurred significant opportunity loss from inefficient price transmission on long tenor Gilt yields from the 1.25% rate cut in 2015. All combined, it will be great if Bank Nifty can close above October 2015 high of 18029, which is 3.75% below 2014 close of 18736. For now, immediate resistance at 17450-17500 looks fragile for extension not beyond 17850-18000 with minor support base at 16550-16700. Beyond here, do not rule out downside risks into set strategic base at 15650-16000, which should hold. It is good to focus rest of 2015 at 15850/16000-17850/18000 with most trades at intermediate risk-neutral zone of 16600-17250.

Money Market : win-win for short term borrowers and long term investors with short term pain for Banks on the investment portfolio

The play in 2015 is on the tenor spread between the operating Repo rate and 10Y bond yield. While the Repo rate is down from 8% to 6.75%, 10Y bond yield slipped from over 8% to 7.45% before up to 7.78%, thus pushing the tenor spread from near zero to over 1%. In this process, significant drop in short term money market rates (upto 1 year) is cheer to borrowers without causing significant hurt to long term retail investors. Despite 1.25% rate cut in 2015, RBI should not be in discomfort with current price transmission which is in satisfaction to "vocal borrowers" and "silent savers". What Next? The sentiment is not in favour of long term bonds when RBI is in extended rate pause mode while FED prepares for start of rate hike cycle. Till CPI inflation trend shifts to lower end of 4-6% long term tolerance zone, India-US 10Y yield-spread at/sub 5.35% will only build downside risk both on India Bonds and Rupee exchange rate. It is good to allow short term stability at 5.35-5.60%. Given the US 10Y short term yield stability at 2.15-2.50%, India 10Y bond yield is set to be in sideways mode at 7.75-7.85%. The strategy therefore is straight forward - to stay overweight and build duration at 7.85-7.93% and avoid chasing recovery into 7.65-7.72% seen as duration-cut zone, retaining tolerance zone of 90-110 bps between 10Y bond yield and operating Repo rate. The comfort is that 2014 close of 10Y bond around 8% is safe with expected close at higher end of 7.70-7.85/7.93%. While 15-20 bps year-on-year appreciation is ok for domestic investors, foreign investors take pain against 6-7% Rupee depreciation.

Currency Market : It is distant away for Rupee stability and for shift into consolidation mode

Rupee is already distant away from 2014 close of 63.03 and seen weak to punch a new 2015 low beyond recent 66.90, down by over 6%. However, there are many comfort cues. Rupee depreciation is lower than 1 year time value interest differential of average 7%. Rupee depreciation is lower than USD appreciation against major currencies; DXY already up by over 16% at over 100 against 2014 close of 90.27. Rupee is up against Euro by over 7% against 2014 close of 76.24. All combined, Rupee exchange rate volatility has not caused pain and agony to most stakeholders on end-to-end basis. What Next? Rupee has lost the aggressive FPI support for now. This has pulled in importers fear and exporters greed driving the forward market in $ demand driven mode. Despite RBI having comfortable reserve position, the need for fair-value adjustment of Rupee along with peers will only lead RBI to speed-break the adjustment rather than play against the trend. All taken, Rupee is at risk of shift of play to 66.20/66.50-68.50/68.80 in traction with DXY bullish momentum at 99.35/99.85-101.85/102.35. It will be pain for "carry trade" FC borrowers on 12M $ shift to 70.50-72.50 trading range, up from previous 69-71. It is important for RBI to protect July-August 2013 low of 68.60-68.85 to avoid set up of panic, which then would need yet another set of administrative strictures and NRI scheme. The positive take-away is the set up of appetite for "Masala Bonds" from foreign investors and lenders.

EUR/INR is solid at 69.90/70.15-70.90/71.15 while EUR/USD stay in sideways mode at 1.0450/1.05-1.0650/1.07 and USD/INR at 66.65-67.15. It will be very slippery turf below 70 against breakout bias into 72.50 on sharp relief correction on the EUR/USD and marginal relief for Rupee.

Moses Harding

Note : I am shifting base from Kolkata to Mumbai, hence may not be available for rest of December. Will try my best to show my presence here off and on. Best wishes, Good luck and take care!

RBI Monetary Policy review : No action, but outlook and guidance tone matter!....Read on...

Ineffective rate cut transmission - blessing in disguise!

RBI is in disappointment mode post the 29th September 50 bps rate cut. The expectation then was either rate pause or 25 bps rate cut. RBI was expected to stay in caution ahead of mid October FOMC for better clarity on FED stance on timing of start of rate hike cycle and the quantum. RBI took comfort from the then expectation by majority that FED may shift rate hike actions to 2016. The comfort was also from successive sub 5% CPI (and WPI) print in July & August, and robust FII flows fueling Rupee strength and downside pressure on Bond yields across tenors. 10Y bond yield did cover maximum 25 bps rate cut with gradual decline from 7.90-7.93% to 7.70-7.73% preparing for stability around par value. The pleasant surprise of overdose 50 bps cut brought cheer with post action 10Y bond rally into 7.45-7.50% squeezing India-US 10Y yield-spread to 5.35%. The unfortunate "twist" was here; FOMC guidance tone on mid October review was hawkish giving signal for mid December rate hike driving the US 10Y yield from 1.90-1.95% to 2.30-2.35%, which undid the FII appetite to drive 10Y bond to 7.75-7.78% and Rupee from 64.70-64.85 to 66.65-66.90. The disguise is from the fact that 1.25% rate cut transmission has turned inefficient with rate-cut ammunition have turned ineffective. The blessings is from both interest and exchange rate. The spread between India 10Y yield and Repo rate is sharply up from sub zero to 1% in 2015. The sharp decline in short term money market rates by over 1% and status-quo yields on the medium to long term tenors is win-win for "vocal borrowers" and "silent savers". The post 29th September rate cut Rupee rally from 66.40 to 64.70 is to the discomfort of RBI when USD was extending gains over major and emerging markets currencies. Rupee value at 66.65-66.90 is seen good to retain export competitiveness and attractive to FDI and Masala Bonds. A weak Rupee will also lead to FPI turning overweight on India Bonds when equity appetite is low.

What will be RBI response to the post 50 bps rate cut adverse impact on Bond yields and Rupee exchange rate? With October CPI back at over 5% against risk of unwind of tailwind support from price advantage of Brent Crude & Rupee exchange rate and worry from spiraling food prices, what is RBI outlook on inflation on the way forward?

Sustainable comfort on inflation is seen to be distant away

RBI is expected to stay in discomfort on CPI outlook. The pressure is likely to be from the risk of price stability of Brent Crude at elevated levels of $45-60 taking away the expected comfort at $35-50, Rupee under pressure at 66-69 and supply side pressure on food prices. The pipeline efforts to get India growth momentum beyond 7.5% is inflationary against low short term money market rates and higher consumption led demand over limited supplies. While stop-gap measures on supply side can provide temporary relief, RBI concerns will be on long term sustainability given the very limited bandwidth on rate post 1.25% rate cut in 2015. RBI has no space to provide comfort to stakeholders from favourable inflation expectation till end of FY16. While set long term CPI tolerance zone of 4-6% is safe, sustainability at 4-5% is in doubt for RBI to ease system liquidity from deficit to surplus. RBI will stay in caution retaining end FY16 outlook around 5.5% with slippage bias into higher end of 5-6% rather than lower end. The probability of 25 bps rate cut in Q2/2016 on sub 5% CPI print as at end of FY16 is very low at this stage. The resultant elevated 10Y bond yield at 7.65-7.90% is good to retain FPI appetite and ease pressure on Rupee exchange rate.

Need to revive investors and lenders confidence to restore India optimism

Banks and financial intermediaries are not seen to be active participants to India capacity expansion against pressure from Capital and NPAs. When the revenues is under squeeze, the comfort from buffer income from investment book is now behind. It is less said the better on the psyche of the investor community, both domestic and foreign. RBI has the critical task to improve the fire-power of Banks and non-Bank financial intermediaries, leading to better risk-reward environment for investors. Government is already working on resolutions to structural woes around Financial system, but RBI's role to make them work is critical. The track record on successful execution of reforms and measures is not good, hence the expectations from RBI to provide the necessary comfort to investors and higher risk-on bandwidth for lenders.

Measures to ring-fence India from rising US yields and speed-break its impact on financial markets

FED is seen to start the rate-hike cycle in mid-December FOMC meeting. The majority expectation is for 2-step 25 bps hike before end of FY16. RBI will be left to defend 10Y bond at 7.93% and Rupee at 68.85. The impact on India equity markets will also be adverse, not ruling out new NIFTY 2015 low below 7500. Investors will look for cues from RBI guidance to turn overweight for the short/medium term or turn light in the short term retaining appetite till better clarity.

It is non-event (before the event) on policy rates, but lots to hear on RBI's outlook on the way forward

This is one of the few occasions when an RBI policy review event has gone out of focus before the policy day. There is no case for review of 6.75% operating Repo rate or the need to tinker with CRR or SLR. RBI can't cut HTM limit when 10Y bond yield is up from 7.45% to over 7.75%. The expectation will be on either hope & confidence or caution & discomfort from RBI outlook and guidance on the way forward. Fingers crossed!

Moses Harding

Financial and Tax reforms key to build India economic and social prosperity! Rough weather ahead....Read on...

Most irritants continue to stay as hurdles

India continue to be bothered by issues related to policy initiatives and execution bottlenecks. UPA lead by the Congress Party was booted out in May 2014 on issues around policy paralysis, regulatory irritants, administrative & execution bottlenecks, and all leading to corrupt practices, under-capacity productivity and poor efficiency. This triggered combination of anti-Congress and pro-NaMo wave to give BJP a single party majority in the Lok Sabha in May 2014. The hope and optimism did turn into euphoria taking comfort from the able leadership of NaMo, who was expected to sell India Story abroad and to build strong and efficient teams in the Government to step up pace from ideation to execution phase for on-ground impact of economic, monetary and social benefits.

The issues impacting external stakeholders are around policies related to legal, taxation and inordinate delay & complexities involved from investment entry stage to repatriation of returns. NaMo has done a good job in taking the India story abroad to deep-pocket nations, who can bring debt & equity into India and also support the Make-in-India initiative to balance expansion of domestic productivity and emerge as supplier of goods to feed external demand and consumption. The agenda is great on paper and in the right direction. The external stakeholders - investors, lenders and manufacturers are now in wait-and-watch mode with keen attention on various pipeline policy initiatives and better clarity on execution capabilities. Rolling out "red carpet" through liberalisation (and expansion) of ownership limits across sectors is good to attract attention but not good to pull hard cash. India has to emerge as one of the best destination for ease of doing business with no complex issues around entry and exit barriers.

Financial reforms key to build domestic capacity and attract foreign liquidity

The domestic financial system looks great from outside, but saddled with lot of inefficiencies around capital and NPAs in systemic important public and private sector banks, and fringe participation from Development Financial Institutions. The PSU banking system is in struggle for Capital, both for growth and strategic restructuring of its non-performing asset/loan book leading to revenue squeeze, low productivity and poor efficiency. The allocation of huge capital from exchequer to PSU banks is low in the absence of deep-pocket purse while dilution of public stake to private is not a sensible option at below par valuation. It is kind of between the devil and the deep sea. The solution is obvious to improve the efficiency of PSU banks and to build valuation before significant dilution from majority public stake to majority private for accumulation of huge premium to Capital funds, the way private sector banks have enlarged the capital base since 2004 through dilution of marginal stake for significant capital funds without dilution on the return on capital funds.

The actions now should revolve around NPA management. The huge NPA portfolio need to be shifted out from debt to cash or equity. The recent restructuring measures are only to shift the inevitable default risk from now to later date with the hope that Banks will build capabilities to absorb provisions. The role of the Government to participate in restructuring of the NPAs in core sectors around infrastructure and commodities is very critical to gain investor confidence on large Public Sector Banks. The stress loan book without adequate asset coverage have to be moved out from the Banks balance sheet to Government owned (or sponsored) finance (or investment) vehicles. The next agenda is the Bankruptcy Act which should remove the irritants for Banks and comfort of the borrowers. While the Banks are under pressure for accelerated provision on the NPAs, recovery process from the borrowers take decades. Against this huge time lag between provisions and actual recovery, Banks are expected to provide 50-75% of gross NPAs from the profit when most Banks are under revenue pressures from either the competition or the inefficiencies. The two measures of creation of National Infrastructure Fund and revised Bankruptcy Code are in the right direction. As always, execution risk remain valid if adequate cash is not allocated for the fund and stringent (and punitive) legal actions are not initiated on willful defaulters and/or impropriety use of borrowed funds. It is not proper to plough into tax payers money for the protection of large borrowers. The efficiency in which money is recovered from small borrowers should also be deployed for large borrowers.

Tax reforms critical for fiscal prudence and cost optimisation

India Taxation mechanism is inefficient both on the cost and revenue side. The inefficiencies on the revenue side is from tax evasion of many and understatement by most, while genuine payers not getting desired value for the contribution. The cost of collection of revenue is also inefficient. The multi-tier tax policy is also making things complex and leading to evasion. The Government has taken steps to plug revenue leakages and cost management which are seen as steps in the right direction to remove structural bottlenecks for long term sustainable benefits. The GST roll-out has been on "paper" for long which will remove the complexity in tax payment and collection. Will it be through (and done) now in the winter session of Parliament? Earlier the better to restore confidence on the Indian economy and financial markets.

Public resources critical to accelerate private investments and to attract offshore long term liquidity

Public investment for expansion of economic productivity is low. The exchequer is finding it difficult to meet both ends meet with most money spent on administration, subsidy consumption and social obligations around defence, security, legal, health care and education. Most developed economies revenues are from combination of taxes and profits from public sector enterprises. The capital/cash burn for running most PSU entities need to be stopped and turned into contributors to exchequer. This will lead to lower taxation leaving more monies for consumption. Genuine tax payers end up paying more than 50% by way of direct and indirect taxes which is inefficient. The only way is to bring in effectiveness in revenue collection, thrift in cost management, efficiency in PSU enterprises and to reduce spending on unproductive consumption items.

India can not aspire to become super power unless it emerges as best-fit building strengths on the economy, finance, defence, security and social standards. In all these parameters, India is below par/median amongst peers, and laggard with large gap with the leaders. The agenda has to be 3 phase - doing it right to be above par, doing it well to be best-in-class and diversify & build scale to be amongst the leaders. The Government now has the agenda to do things right removing the inefficiencies and bottlenecks switching from lower gears to high/top gear cruise mode; low-gear cruise (for extended time period) will lead to engine failure sooner than later! This is the caution and risk factor ahead on the political system. Can India political parties be kind enough to upgrade maturity for the good of the country and its people? As always, retain hope shifting the sentiments between optimism and pessimism. It is good that people have the patience to retain hope, waiting for the sight of light at the end of the tunnel! Will we see the light in 2016?

Moses Harding

Global Markets this week : With no trend clarity, fleet-footed is the way2go!...Read on...

Two-way swing with no unanimity on FED rate action expectation

Global markets in (2-way) volatile mode adjusting value between expectation of 25 bps rate hike followed by unwind not ruling out rate pause and back again to build rate hike risk. It has been trader's markets ahead of FED rate decision (and guidance) for trades in back-and-forth mode at set ranges adjusted to extremes of 25 bps hike and pause. What is not covered the hawkish policy guidance tone for accelerated pace.

Pre FOMC DJIA index focus was set 17000/17150-17850/18000. The intra-November moves have been at 17977 to 17210 to 17914 with close at 17823. The bias on move closer to FOMC is neutral either for stretch into 18000-18350 or extended push-back to 16650-17000, but all within upper-half of set 2015 strategic focus range of 14850/15350-17850/18350. It would need a very hawkish stance to get the pressure into lower-half which is low probability. Given the US & Euro zone priority attention (along with Russia) to restore order in Syria, it's prudent to retain stability in Financial markets by avoiding "bolt from the blue" monetary triggers. Therefore, the probability of pleasant surprise (from the FOMC) is higher than the getting an unpleasant shocker! Based on this outlook, US 10Y yield is in back-and-forth mode at set focus range of 2.20/2.25-2.35/2.40% with intra-November moves between 2.23 to 2.38% with close at 2.26%. The post FOMC breakout bias is neutral between 2.10-2.20% and 2.40-2.50% with stretch beyond here tough to sustain.

Gold 3-month recovery from 1077 to 1185-1200 target (high at 1190.63) got unwound in 1 month into 1065-1070 (low at 1064.95) before consolidation at 1065/1070-1085/1090. The undertone continues to remain weak for stretch into 1020/1035-1050 against firm near term resistance at 1085-1100. In the big-picture (into 2016), the range focus is biased at 950/985-1100/1135.

Brent failed to retain steam at 52.50-55 shifting focus back to lower end support zone of 40-42.50 (from September high of 54.32 and October high of 54.05 to November low of 43.15 before close at 44.66). Brent Crude unable to derive support from military tensions around the Oil production zone is surprise, which is unusual behaviour. Is the demand compression so huge to ignore worries from supply and spike in risk premium? What Now? The moves since 2009-2012 is very wide between 36.20 to 128.40, and now at lower end. There has to be hedge demand at value 40-45, sustainability at 40-50 is dream, hence tough to be true for long. It is God's gift for oil importers to make hay while the sun shines at 40-45. For now, stay tuned at 40/42.50-48.50/50 retaining breakout bias into 53.50-55 against unsustainable stretch into 35-36.50.

USD bullish momentum (DXY from 92.62) met target 99.85-100.35 (high at 99.85 before correction into 98.50-98.85 for bullish close at 99.60). The intra-2015 moves in DXY is more or less to the script with outlook for back-and-forth volatility at 92/93.50-98.50/100. Now, the pressure is on April high of 99.99 and March high of 100.39. Inability to break into 100-100.35 and deeper push-back into 96-98.50 is signal for revert into neutral consolidation at upper-half of 92.50-100.50 at 96.50-100.50 awaiting FED.

EUR/USD complete its back-and-forth play at 1.05/1.0650-1.15/1.1650 with correction from 1.06-1.0650 losing steam at 1.0750-1.08. What Next? Need to watch USD bullish momentum while DXY at 99.85-100.35 and EUR/USD at 1.05-1.0650. Can DXY shift bullish gear beyond 100.50 driving EUR/USD below 1.0450? No clear answer to this now ahead of FOMC. Till then it is prudent to stay with neutral bias at 1.0450/1.06-1.0850/1.10.

The FED options are amongst  (a) deliver to expectation with 25 bps hike with neutral to cautious data dependent guidance  (b) rate pause awaiting more clarity with near 100% probability post festive season and (c) 25 bps hike with hawkish guidance for regular baby steps beyond 50 bps. I tend to stay 51:49 for option (a) against (b) ruling out option (c).

India assets in relief recovery mode with fear of the unknown on the way ahead

The impact on India risk-on assets from external cues have already turned against, from combination of FED monetary policy shift and FPI appetite shift. Domestic cues are also not in favour despite some decisions (and measures) post Bihar results. The only consolation in the near/short term is the relatively cheaper valuation compared to 2015 peak pulling support from short-squeeze, DII bids and from others who missed post NaMo rally. Taking all these, near term focus is fixed in Nifty at 7700/7750-8000/8050 for short term stretch not beyond 7500/7650-8200/8350. Bank NIFTY near term focus retained at 16700/16800-17400/17500 with short term stretch restricted at 16000/16150-17850/18000. Good to stay focused end2end for now.

India 10Y bond yield base is seen firm at 7.63-7.66% with risk of overshoot beyond 7.72-7.75%. In addition to FED rate hike and low FPI appetite, fresh concerns have emerged on fiscal deficit, inflation and higher supply against reduced demand. All combined could lead to RBI rate pause in 2016 and downside risk on the value. While strategic appetite from domestic investors will emerge at 7.72-7.75%, the underlying trend (into 2016) will stay bearish for 7.90-7.93%. Against this big-picture outlook, set 10Y bond focus at 7.65-7.75% for now in traction with US 10Y at 2.20-2.30% with spread around 5.45%. It is unfortunate that the 2-step intra-2015 rally from 7.93%/7.75% to 7.45-7.50% is half unwound (with 7.45% to 7.75% fall) for risk build up for more into 7.75-7.93%.

Rupee recovery from 66.50 held at 65.85-65.90 against import hedge support zones of end December at 66.35-66.50 and 12M $ 70-70.25. The major risk on the Rupee is now from the extent of stretch in DXY beyond 99.85-100.35 and the level of FPI exit from India risk-on assets. All taken, the short term big-picture is already set at 65.70/65.85-66.85/67 (stop at 65.50 or 67.20 for new range shift) against near term play at lower half with most trades at 65.85-66.35 followed by time-decay adjusted shift to 66.05-66.55. The hedge strategy is unchanged watching end December at 66.35-66.85 and 12M at 70/70.25-71/71.25.

EUR/INR complete the push-back from 72.50 to 70 (low at 70.10 from high 72.49) for short-squeeze driven correction into intermediate resist zone at 70.90-71.15. The near term momentum continue to remain bearish for 68.65-69.15 for pre FOMC consolidation at 69-71.50 (reviewed from previous 70-72.50).

Have a great week ahead; Good luck!

Moses Harding

Will India ever bridge the gap with China? Doubt it!....Read on...

Ferrari drive versus shift from an Ambassador to Maruti-Suzuki

China began the economic liberalisation journey two decades ahead of India and since then to now, the journey has moved on to a kind of express-way road in high powered Ferrari engine. India began late in early 1990's and since then have upgraded from an ambassador car to Maruti-Suzuki on to single way uneven road.

All to do with political maturity and execution efficiency

We talk about evolving domestic (and external) tailwind support and headwind resistance without getting much attention to the major domestic hurdles from absence of political maturity and poor execution efficiency. The comparison of India with China on these two aspects will lend credence to my doubts on India's capabilities to bridge the widening gap during my life time, and I am not old by the way!

Political maturity is not really relevant in China given the one-man, one-party environment. Anything is possible, good bad or ugly! In the developed World, politics exist only during the election period. Post verdict, all are together for a common cause for stepping up economic well-being of the country and ensuring social upgrade of its people. Unfortunately, neither of that exist in India. We may not aspire for Chinese kind of political authority, which may end up very good or go disastrous with ultimate powers with one party and few strong individuals in control. The best option is to get the political system together for India economic well-being for social upliftment of its people, who are said to be the masters in the democratic political set up.

We import capital, liquidity, goods & services, technology, Intellectual property and more from the developed countries, why not political maturity? The only agenda of the Indian opposition parties is to wish (and ensure) that the ruling party doesn't deliver to promises! The intent is to get back to power on the back of failure of the other, without realising the hard fact that the losers are indeed the country and its people! Who cares if they could hold on to power and money? This agenda is sustainable only when majority (called the vote bank) is illiterate and stay dependent on the Government's subsidies and freebies. No party is different in this agenda; BJP did that to the UPA then and getting paid back by the Congress Party to NDA now! This vicious circle has to be broken if India has to stay where it is now and to cut the risk of getting labeled as insignificant. The delay in getting critical policy reforms around GST, Land reforms etc are testimonials to the case in point.

Direct executive action versus lot of noises with delayed action

We don't get to hear noises around strategies and tactics from China, what we hear loud and clear is the execution actions to realise the end result at break-neck speed. It applies even to Monetary policies - without noises and discussions around what needs to be done; rate actions or liquidity management is done instantly before it is demanded by the system.

It is different in India! We hear lot of noises around what is necessary; some get done with delay, while most gets into time-out mode making 5 years tenure too short to take initiatives (and measures) from ideation to execution phase. NDA is already through 18 months of power, just short of half-way mark but nothing much done. The intent is good and related strategies are clear, but the significant delay in converting the same into tactics (policy and regulatory measures) to get into execution mode is the serious concern. The UPA was booted out for reasons of policy paralysis, regulatory irritants and administrative (and executive) bottlenecks. NaMo (and BJP) was seen to be the only alternative and got single-party mandate with hope and optimism. The external stakeholders got relieved with hope of removal of issues around policies, regulations and execution. It is 18 months behind since then, but nothing much visible on the ground. The financial markets are nervous with risk-on equity assets having unwound around 15% from 2015 high. The 1.25% rate cut in 2015 has not helped. Loss of FII appetite with risk of shift into exit mode is exerting pressure on the Rupee exchange rate. India can't survive for long from external support from lower commodity prices from demand compression and liquidity flow in the absence of opportunities in the developed and major economies.

It is a wake up call now with political environment shifting from bad to worse; Congress Party is getting into the act of opposition collaboration to counter BJP and the Government. NaMo has tough job ahead to translate his India Vision into reality. Opposition parties should realise the real fact that the India political behaviour will make India an insignificant player over long term when the gap between India and China will keep widening. It is also possible that someone else may replace India as alternate to China in the global system shifting the global attention away from India!

By end 2016, the halfway mark would have been hit to make things better or worse. Hence see 2016 is the make-or-break year for India, it's economy and financial markets. Let's hope for the better! What else to say! The financial markets are already showing signs of 2015 close below 2014 close. It is important to get the 2016 close above 2015. Thinking aloud for "powers that be" to respond!

Moses Harding

Gold Monetisation Scheme: A Critical Analysis - Dalal Street Investment Journal

Global markets in the week ahead : Is the worst really behind? Read on.....

Can liquidity driven rally on equity assets hold on to stretch valuation in the absence of support from fundamentals?

Despite weak macroeconomic fundamentals, G7 risk-on equity assets have built significant valuation since 2009. Central Banks are in ultra-dovish monetary policy stance since then, pumping huge liquidity at near zero interest rates and now with bloated Balance Sheet. The regime of zero (or negative) return on idle funds parked with Banks is with intent to build economic capacity through leveraged consumption. Despite FED ending QE in 2014, others in Euro zone, Japan and China are still in extended supportive mode. Unfortunate part is that all these measures have not led to economic growth, but only led to liquidity flows into risk-on assets for short term "carry trade" play. In the absence of fundamental support, liquidity driven rally has to end at some point, at hot-to-hold valuation. DJIA multi-year rally from below 6500 is already losing steam over 18000. During this period, NIFTY rallied from below 2500 to over 9000 before reversal. The reasons for inability to pick up global growth momentum despite 5-7 years of overdose monetary support is mystery - "something is seriously wrong somewhere".

The Indian scenario is more complex despite optimism since mid 2014. The macroeconomic fundamentals look definitely better, but not with significant economic capacity expansion. The GDP growth got lifted up from below 5% to over 7% on the book through review of base year calculation. The significant improvement on the CAD, inflation and fiscal deficit is largely due to sharp decline in Crude. The external appetite for India is more to do with others being worse, and attracted by elevated interest rates & sharp decline in Rupee exchange rate. The comfort is from opening up of huge opportunities, while the risk is from execution efficiency. While India is still seen as "best among the bad" (along with China), it is not good enough to sustain stretch valuation in the absence of backing by strong fundamentals.

What Next? MARKET PULSE set 2015 focus on DJIA at 14850/15350-17850/18350 covering the above-said dynamics in play against 2014 close of 17823. As per script, overshoot beyond the hot-to-hold resistance point 18350 was short-lived with punch at 18351 (in May) before sharp unwind to low of 15370 (in August) followed by recovery into 17977 (on 3rd November). Now, the pace of correction from below 18000 into set target at 16850-17000 is worry with weekly close below 17250-17350. The cues ahead are complex with conflict between the FOMC  and IMF on FED preparedness for December rate-hike. The economic data from G7/G20 (excluding the US) provide little comfort on growth, consumption and employment. It's not good risk to stay invested in risk-on equity assets taking comfort from liquidity support from G7 (excluding US). All taken, the short term outlook is not in favour, thus setting up risk of extended correction into 16600, seen as make-or-break point which is also mid-point of set 2015 strategic focus range of 14850/15350-17850/18350. For now, it is good stay focused at 16500/16650-18000/18150 with short term cap at 18250-18350. Given the liquidity support and possibility of rate-steady FED in 1st week December FOMC meeting, risk-on buy would emerge at 16500-16650.

NIFTY comfort is largely from significant unwind in valuation since March 2015 high of 9119 to 7730 (by over 15%) and not far away from (September) 2015 low of 7539 which is just 2.5% short pulling in short-squeeze bids and value-buy appetite. MARKET PULSE 2015 strategy was not to chase NIFTY into 9000-9150 and to accumulate at 7500-7650. While 2015 high is seen very safe, uncertainty is from the hold at 2015 low at 7539. The unfortunate part is that 50 bps rate cut support rally from 7691 to 8336 (between 29/10 to 26/10) is set to unwind completely by stretch into 7539-7691 in the immediate term. The short term resistance  (for rest of 2015) is away at 8115-8150 and 8315-8350 not ruling out 2015 close below 2014 close of 8282. The  immediate minor support at 7685-7710 with make-or-break support zone of 7500-7535, which is likely to hold. MARKET PULSE has already squeezed the Q4/2015 (post 29th September rate cut) range focus at 7500/7535-8315/8350 and with break below mid-point 7925, the bias was for test/break of 7750-7785 which is done now with low of 7730 before weekly close at 7769. For the week, short-squeeze correction will be shallow at 7850-7885 with firm resistance zone/cap at 7915-7950. The downside pressure at 7685-7710 is likely to give way for stretch into 7500-7550 before consolidation at 7535-7935; break below 7500 will be very bearish. Stop for weekly big-picture focus is at 7500 and 7950.

Bank NIFTY went sharply down to 16587 from 2015 high of 20907 (by over 20%) against 2014 close of 18736. The sharp unwind post 1.25% rate cut in 2015 says it all on the woes from NPA and Capital squeeze on Banks P&L and Balance Sheet. The 2015 focus was set at 15000/15850-20650/21000 and have seen end-to-end with stability around 16850 now. Can the 2015 low punch at 15762 stay safe? There is high probability of staying firm post the recent measures to find structural resolutions relating to Capital (through enhanced FDI limit) and steps to reduce the huge NPA burden largely from infrastructure and price sensitive commodity sectors. The earnings risk is from hardening bond yields (leading to huge opportunity and real losses on the Banks investment book), squeeze in the intermediation margin and increased competition in the lucrative product segments of low cost CASA, high yield small ticket loans and Transaction Banking fees. All taken, Bank Nifty is likely to outperform NIFTY for rest of 2015 in bullish consolidation mode at 15850-18250 with intermediate resistance zone at 17050-17450. For the week, it is good to retain focus at 16500/16650-17350/17500 in sideways mode with 51% bias for unsustainable stretch into 15850-16000.

Limited clarity on the trend in Gilt yields

The huge volatility in US 10Y yield has impacted most markets; Euro zone woes drove US 10Y yield down from over 3% to 1.65% in 2014 before stability at 1.85/2.0-2.35/2.50% in 2015 (low at 1.91% and high at 2.50%), and now in risk-neutral mode at 2.25-2.35%. What Next? FED holds the trigger for breakout of 2.20-2.35% pre FOMC focus range. FED rate-hike would trigger move into 2.35-2.50%, while rate-pause get the focus back into 2.05-2.20%. The most critical will be the policy guidance tone between neutral to hawkish. At this stage (against IMF red flag on rate hike while G7 in extended dovish stance), set 51% probability of mid-December FED rate hike; eitherway, volatility will be extreme in thin Christmas holidays market conditions. For the week, good to retain focus at 2.20-2.35% with marginal bias for spike into higher end of 2.35-2.50%.

India 10Y bond has now completed the expected FY16 rally from 7.90-7.93% to 7.47-7.50% ahead of time at end H1/FY16, and now in end-to-end sideways mode at intermediate zone of 7.65-7.75%. What Next? RBI next round of rate cut is seen distant away, having already unwound impact of 25 bps rate cut, seen as more than necessary of the 50 bps cut delivered on 29th September. The probability of CPI stability at 5-5.5% in rest of FY16 is higher than ease into 4.5-5.0% which puts RBI in extended rate-pause mode. During this time, it is higher probability of FED delivery of 50 bps rate hike before end of FY16. Combination of RBI and FED monetary policy stance, India 10Y bond range focus is now set at 7.60-7.85% with India-US yield spread squeeze to 5.20-5.35% cutting FPI appetite significantly till USD/INR exchange rate correction into upper-half of 65-70. For the week, it is good to retain focus at 7.60/7.62-7.73/7.75%. The strategic play is to unwind "long" (entered at 7.73-7.75%) book at 7.60-7.62%. Banks also will be seen cutting duration here on core SLR book for reinstate at 7.75-7.85%.

USD retain bullish undertone despite swift rally into 2015 high

DXY intra-2015 moves have been volatile within set strategic focus at 90/92.50-98.50/100 against 2014 close of 90.27. The back-and-forth moves are wild at 90.24 to 100.39 to 92.62 and now at 98-99.50. USD continues to retain its strong hold on major (and EM) currencies, both from macroeconomic and interest rate advantage. Will DXY punch a new 2015 high over 100.39? Between Yes and No, the bias is in favour of punch of new high if FED is seen ok for bullish extension beyond 100. For the week, it is good to retain focus at 97.85-100.35 with extended correction not beyond 96.50-96.85 while retaining bullish momentum for break of 100.35 to test FED nerves whether to intervene or be with the flow.

EUR/USD is the worst hit in 2015 down by over 13.5% in Q1/2015 to low of 1.0450 from 2014 close around 1.21. The recovery from here was equally swift to August high of 1.1711 and now under pressure at 1.07-1.0850. What Next? Post the Q1/2015 crash, MARKET PULSE strategic big-picture focus was set at 1.05/1.0650-1.15/1.1650; since then overshoot into 1.0456 and 1.1711 couldn't last beyond intra-day. Now 1.05-1.0650, seen as short-squeeze (and long-build) zone is at striking distance is at risk against the DXY bullish momentum beyond 100.35? It depends on FED guidance more than the token rate hike act; neutral guidance with 25 bps hike will lead to print of new unsustainable high, while a hawkish guidance can shift the range focus to 98.50-103.50 (driving Euro below 1.05 to striking distance of parity).

Rupee resilience to USD strength is at risk

Rupee has been resilient to USD strength down only by 5% against DXY up by 10% from 2014 close, thanks combination of CAD decline from 5-7% to 1-2% of GDP, robust NRI/FDI flows and huge FPI appetite for India debt & equity assets. But for aggressive RBI $ purchases at 63.35-63.50 & 64.70-64.85 and huge offers at 66.35-66.85, Rupee would have been extremely volatile at 60-70. Can all these dynamics sustain to retain Rupee resilience against the USD strength? The risk is from FPI flows; while elevated Bond yields is relief, consolidation of equity market is essential to cut FPI exit mode. While FPIs move away, USD/INR will build traction with DXY strength and stay diluted with DXY push-back. For now, USD/INR near/short term base seen firm at 65.50-65.85 with bias into 66.50-66.85; consolidation outlook here is valid while DXY at 96.85-100.35 and extended gain beyond 100.35 will build downside risk on the Rupee into 66.85-67.20. The hedging strategy is to cover near/short term imports at 65.95-66.10 (end December 2015 $ at 66.50-66.65) and long term imports at 65.50-65.65 (12M $ at 69.85-70) while exporters stay away for 12M $ at 71-71.25 (spot at 66.85-67.10). Beyond 67.20, focus will shift into August 2013 low of 68.85. Rupee complete unwind of post 29th September strength from 66.35-66.50 to 64.70-64.85 may not be to RBI's dislike. All combined, Rupee retains its nervous undertone from global headwinds and domestic complexities.

EUR/INR post the unsustainable swing between 65.65 and 78.15 (tracking EUR/USD between 1.0450 and 1.17) is seen to be settled at 70.35/70.60-72.15/72.40 within near term big-picture at 70-72.50 while USD/INR at 65.50-66.85 and EUR/USD at 1.05-1.10.

Commodities under pressure with most cues against

Commodity assets have lost advantage from combination of demand-supply and growth-inflation dynamics not being in favour with shift of traction to USD price movements. The abundant liquidity at near zero interest rate has not helped.

Brent Crude recovery from 40-42.50 strategic support zone lost steam at 53.50-55, and now building pressure for more downside risks. MARKET PULSE strategy was to stay focused at 40-55 with bias for bullish extension into 55-70. But given the growth pressure and supplies pile up, near term risk remains for closer look at December 2008 low of 36.20, which will bring more fear than cheer to even Crude importers. For now, may need to review strategic focus from 40/42.50-53.50/55 to 35/36.50-48.50/50 with near 100% probability of relief recovery into 53.50-55 from 37-42, seen as good hedge for oil importers.

Gold under pressure again at 1070-1085 having lost over 8% from 2014 close of 1183.50 and by over 17% from intra-2015 high of 1306. Gold has lost its safe-haven status from low inflation and Central Bank sales for cash liquidity. MARKET PULSE was on the down-hill chase through 2015 for 1070-1085 and favoured deep correction from here into 1185-1200 before sharply down. The fall from 1185-1200 (high at 1190.60) since mid October to 1070-1085 is at break-neck speed. Now, the outlook is negative while below 1100-1110 for 950-1000. For now, let us keep close watch at 1070/1080-1100/1110 with bias for downside break into 1000.

Have a great week ahead; Good luck!

Moses Harding

Global Markets review : With Bihar behind and FOMC ahead, What Next? Read on...

Global cues : FOMC policy guidance will set the short term undertone

It has been mixed cues in the Global economy. The overdose liquidity support at near zero (and negative) interest rate policy did arrest severe downside pressure on growth recovery to provide sort of relief to the stakeholders. US economy is leading from the front on the global growth recovery process, and signals for FED shift from dovish to hawkish monetary policy stance are loud and clear. The expectation are more or less unanimous on start of rate hike in December 2015 FOMC meeting. While the markets have factored in 25-50 bps rate hike between December 2015 to March 2016 and extended pause thereafter, any guidance to the contrary will be volatile on markets, either way! The comfort however is from other major markets (Euro zone, Japan and China) staying in ultra-dovish monetary policy stance through 2016. The combination of comfort on growth recovery in 2016 (and beyond) and minimal risk of liquidity squeeze on risk-on assets during this time will keep the global markets between risk-on and risk-neutral mode with low probability of risk-off sell off.

MARKET PULSE set the risk-neutral trading range for DJIA at 17500/17650-18000/18150, while preparing steam for punch of new 2015 high over 18351. The intra-2015 back-and-forth swing at set focus range of  14850/15350-17850/18350 has been perfect with 18351 to 15370 to 17977 big-picture moves since May 2015. It is prudent to stay tuned to 17350/17500-18000/18150 ahead of FOMC guidance (and FED rate action) and stay fleet-footed for breakout either way. A hawkish guidance will extend reversal to 16850-17000 before stability, while a neutral guidance will set up bullish momentum into 18200-18350.

US 10Y Treasury yield has been volatile within set big-picture focus at 1.85/2.0-2.50/2.65% keeping 2015 low of 1.65% distant away. Post the swings between 2.50% to 1.90% since June 2015, now it is in risk-neutral intermediate zone at 2.20-2.35%. The post FOMC trading range is bias neutral between 2.05-2.20% and 2.35-2.50%. It is prudent to set pre & post FOMC range focus at 2.20-2.50% and overshoot either way into 2.05-2.20% or 2.50-2.65% will be tough to sustain.

DXY has been volatile in back-and-forth mode at set big-picture focus range of 92/93.50-98.50/100 with solid recovery from 92.62 to 99.50 since August pulling 100-100.35 to striking distance. The probability of punching new 2015 high beyond 100.39 is high with risk of FED intervention to arrest excessive USD strength. For now, good to retain focus at 98/98.35-100/100.35 with bias into higher end.

EUR/USD has almost completed its back-and-forth play at set big-picture range of 1.05/1.0650-1.15/1.1650 unable to sustain overshoot with moves from 1.0456 to 1.1711 to 1.0673 since March 2015. It is good to stay tuned at 1.0450/1.05-1.0850/1.09 ahead of FOMC and await breakout cues.

Gold has completed back-and-forth play at set focus range of 1070/1085-1185/1200 with 1077 to 1190 to 1083 since July 2015 and now under pressure at lower end. The run upto FOMC bias is weak at 1070/1080-1100/1110. It is prudent to squeeze shorts at 1070-1085 or hold with trail stop at 1110 awaiting test/break of lower end which could pull 950-1000 into the radar.

Brent Crude has been steady at 45/46.50-50/51.50 post the intra-2015 crash from 68.50-70 to 40-42.50 seen as strategic base. For now, retain big-picture play not beyond 40/42.50-50/52.50, not ruling out bullish extension into 55.50-56.

Domestic cues : "cat on the wall" sentiment

India sentiment is seen to be down (and out) in the short term. The external tailwind support is diluted with foreign investor appetite shift to developed and other emerging markets. It is less said the better on the domestic cues. There is no political consensus on economic development agenda, and BJP is seen in struggle to deliver on key economic agenda. The political advantage support since May 2014 is diluted post the Delhi and Bihar verdict against the Government. It is a big setback given the big thumbs down for NaMo. The markets have already responded to these events unwinding the gains from liberal 50 bps rate cut delivered by RBI on 29th September with risk posting new 2015 low across asset classes. In the given dynamics, downside risks can run deep while recovery will be shallow, thus keeping the investor sentiment weak and appetite low.

NIFTY is in struggle at lower-half of set strategic focus at 7500/7650-8350/8500 with failure at post-policy high of 8336 for swift fall to short-squeeze support zone at 7750-7785. The worry is from consistent lower high's since 9119 (March) to 8116 (November) with threat to take out recent low's of September at 7539/7691. MARKET PULSE already shifted pre FOMC focus at 7650/7700-8150/8200 for back-and-forth play. What Next? The open up of FDI flood-gates (post Bihar election setback) is seen as reactive, and at best it could only speed break the bearish momentum. The risk is from lack of appetite from FPIs and the extent of PSU Institutional Investor support to risk-on assets. All combined, the downside risk (on run upto FOMC) and acceleration thereafter is not ruled out. It is prudent to stay cautious in sell-on-recovery mode awaiting credible positive triggers from domestic sector. For now, retain focus at 7500/7650-8000/8150 with minor resist zone at 7885-7935. The near term strategy is tuned for shift into sideways mode at 7500/7550-7800/7850.

Bank NIFTY has been relatively stable at 16500/16600-17000/17100 post the swift fall from post-policy high of 18029/17466 taking out the policy day low of 16648 with punch at 16587. Here again, the headwinds are much stronger than the tailwind support. It is good to retain focus at 16500/16600-17000/17100 with breakout bias into 15750-16250 against short term cap at 17250-17500.

India 10Y bond yield met target 7.50% (post-policy low of 7.47% at 101.64) with multiple times failure at set strategic buy zone of 7.90-7.93% (pre-policy high of 7.93% at 98.70). The expected reversal from long-unwind and duration-cut zone of 7.45-7.50% hit 7.73-7.75% target before close at 7.68%. It was a pleasant wind-surfing ride despite extreme volatility. MARKET PULSE set focus at 7.60/7.62-7.70/7.72% with stretch to 7.75% which is done now. The focus range is now reviewed at 7.65/7.67-7.73/7.75% ahead of FOMC, while US 10Y yield stay in sideways mode at 2.25-2.35%. Given the higher probability for shift into 2.35-2.50% post FOMC, do not rule out India 10Y bond weakness beyond 7.75%.

USD/INR post-policy push-back from 66.35-66.50 held dot at 64.70-64.85 for swift pull-back to starting point with 66.41 to 64.69 to 66.49 moves in back-and-forth mode. Rupee extreme weakness is from combination of domestic woes and DXY rally into set target 99.50-99.85. FPIs and importers bids were huge to be fed by $ supply in the cash and forward segment. RBI rescue at 66.35-66.50 has helped to halt extension into 66.85-67.20 which would have pulled 68.50-68.85 into focus. In the process 12M USD/INR completed its back-and-forth at set focus of 68.75/69-70.75/71.25. MARKET PULSE had set consolidation and mark-time phase at 66/66.20-66.50/66.70, RBI willing. The risk is from sharp break-down open for Rupee, a kind of repeat action of 9/11 from 65.75 to 66.40 shifting RBI protection zone from 65.70-65.85 to 66.35-66.50. The hedging strategy is now tuned to USD/INR range of 65.85/66.20-66.85/67.20 (12M $ at 70/70.25-71/71.25).

EUR/INR is nicely down with lower high's at 75.65/74.50/72.50 with support at set short-squeeze zone of 70.65-70.90. For now, retain 71.65-71.90 as resistance with downside pressure into 70.50-70.65 which should hold for sideways play at 70.65/70.90-71.65/71.90 with overshoot not beyond 72.15-72.40 or 70.15-70.40.

Moses Harding

Career Announcement : What Next?

Now that the news is informed to Stock Exchanges, it is proper to let you all know that I have resigned as Group CEO & Chief Economist of Srei Infrastructure Finance Limited effective 31st October 2015, and will be relieved on or before 31st January 2016.

What Next? is the tough decision now. Having spent around 35 years in Financial Services and Markets, the choice is between extension of the professional career or begin the journey of professional entrepreneur as strategic Consultant/Advisor/Manager to deliver "Value for Money" services to the stakeholders engaged in Financial Markets and Financial Services. In the given markets environment, it is prudent to be penny wise for pound of great rewards, and not stay foolish making real Balance Sheet losses and losing out on great opportunities that the markets offer from time to time. It is all to do with seeing Market risks as equally important (and critical) as Business risks for better productivity of Money and higher efficiency on the Capital.

Will keep you posted on What Next?

Best wishes for a great year ahead!

Moses Harding

9674734145

Markets this week : Is India losing shine as the most favoured investment destination? Read on...

When Global Markets shift to risk-on mode, India in struggle from domestic woes

Global Markets have weathered the recent storm from Central Banks triggered price volatility. The PBoC triggered monetary policy actions (and resultant concerns on global growth recovery) triggered risk-off crash in Global markets, driving DJIA from 18350 to 15350, 10Y US yield down from 2.30-2.35% to 1.95-2.0% and DXY from 98-98.50 to 92.50-93 during June - September 2015. During this period, Gold also regained steam for rally from 1100 to 1185-1200. What followed thereafter was relief from combination of supportive monetary triggers from ECB and growth confidence from the US economy, driving the sentiments back into risk-on mode unwinding most of recent losses for status-quo position. DJIA is now back at 17850-18350, US 10Y at 2.20-2.35%, DXY at 98-98.35 and Gold at 1100-1115. Ideally, this shift from risk-off to risk-on mode along with RBI surprise 50 bps rate cut on 29th September should have added fuel to India markets recovery towards high levels of 2015. In contrast, NIFTY has unwound most of post 29th September rally from 7691 to 8336, Bank Nifty from 16648 to 18029, 10Y bond from 7.75 to 7.45% and Rupee from 66.41 to 64.69. When India is seen as the most attractive investment decision, markets losing traction with external risk-on bullish sentiment was seen as major risk in play when FED is preparing for December rate hike!

MARKET PULSE highlighted the "something invisible" factor that is hurting the investor sentiment (and confidence) when India was going through the Bihar election process. It was also pointed out that the system is shifting to lower gears on economic development agenda, and into higher gears on other non-productive matters around intolerance. The premium extended to the capabilities of BJP (and Modi) to fast track India economic development got into the process of unwind. The pent-up confidence  (and euphoria) built from May 2014 - March/June 2015 is getting unwound, and now it may gain speed if immediate course-corrective  actions are not initiated to restore the investor confidence.

BJP leadership can't take the decisive Bihar mandate (in favour of the opposition) as matter of fact. Most expectations were around split verdict, but the result has come as a shocker to the BJP and to external stakeholders. The "noises" around intolerance has to be shut and need to see top-gear cruise on India economic development. If the Bihar verdict is taken as "wake-up-call" by BJP, then the damage from here may be limited. If lessons are not learnt from Delhi and Bihar, then tough days are ahead for India Financial markets. All taken, the outlook for rest of 2015 is not positive for India Financial markets. While Global markets set up bullish momentum to post new 2015 high's, India will be under pressure to defend 2015 low's, thus setting up risk of India losing its most favoured investment destination. Will FPIs stay put in this change of dynamics of the India asset markets?

India equity markets retain bearish undertone: protection of 2015 low is essential

NIFTY close below 7985-8000 (at 7954) takes into account a kind of hung verdict giving BJP the single largest party status. But, the outcome of clean sweep to the United opposition is unpleasant shocker to market stakeholders. This sets up immediate risk on pre 50 bps rate cut low of 7691 and 7539. The unwind from post-policy high of 8336 to 7926 is not positive, making the rate cut support irrelevant. Taking all these developments (and related risks), MARKET PULSE already shifted NIFTY focus at 7650/7700-8150/8200 post the unwind of post-policy recovery from  8335-8350 to 7985-8000 with correction hold at 8115-8150. The damage on Bank NIFTY is more severe with push down from 18000-18100 to 16850-17100. What Next? When Global markets go into near term correction mode ahead of FED rate hike event (unwinding recent recovery), negative vibes from domestic cues is major concern to drive markets down in the immediate term with minor support for Nifty at 7650-7700 and major one at 7500-7550 against minor resistance at 7985-8035 with near term cap at 8115-8150. For the week, it is good to retain focus at 7670/7720-7970/8020 not ruling out stretch into 7500-7550, seen as major short-squeeze support with good appetite from strategic investors.

Bank Nifty under pressure from NPA woes and unwind of mark-to-market gains in Investment portfolio. The opportunity loss from 10Y bond yield unwind from 7.45% to 7.70% is huge. The only benefit is from significant benefit in cost of funds for the next 3-6 months, before turning flat. The immediate resistance zone is at 17100-17200 with major one at 17450-17600. The support at 16900 is set to give way for 16250-16400 not ruling out stretch into short-squeeze support (and strategic buy zone) at 15650-16000. For the week, retain focus at 16250/16400-17050/17200.

India 10Y bond at risk from spike in yield spread with US yield

10Y bond yield spike from 7.45-7.50% to 7.68-7.73% is bearish post the RBI dovish monetary policy stance. The risk from overdose 50 bps rate cut is the extended RBI rate-pause when FED prepares for rate hike. Despite this, India-US 10Y yield-spread got squeezed from 5.60 to 5.45% largely from FPI appetite. The recent political development builds risk of spike in spread into 5.50-5.60% against steady US 10Y at 2.20-2.35%. MARKET PULSE expectation was for 7.60/7.62-7.70/7.72% stability post the unwind from take-profit (and duration-cut) target at 7.50%. Now, may need to review the stance not ruling out stretch weakness beyond 7.72% with short term base at 7.65-7.68%. 10Y benchmark 7.72% 2025 trading at discount (against operating policy rate of 6.75%) may not be to RBI's liking, which is the only support at this stage. For now, it is good to review near term focus at 7.65/7.67-7.73/7.75% and stay end to end. For those who cut duration at 7.45-7.50%, it is manna from the heaven for reinstatement at 7.70-7.75%.

Rupee at risk for retest of pre RBI policy and 2015 low : can it hold here?

Indian Rupee is at risk from combination of domestic and external cues. External headwinds are from bullish undertone of DXY at 97.50-100 with momentum build-up for pass through of 98-98.35 resist zone and shift of FPI appetite to other favoured destinations that would get benefit from risk-on tailwind support. MARKET PULSE reviewed the short term focus from 65.50-67 to 64.50-66.50 post 29th September RBI policy (12M USD/INR at 69-70). The outlook was a gradual unwind of 66.40 to 64.70 post policy recovery with target at 65.70-65.85, and for stretch into 66.15-66.40 on DXY momentum beyond 98.35. Now, things have turned from bad to worse taking the focus range at 65.70/65.85-66.35/66.85. It would need aggressive RBI to avoid free fall momentum into 67.20 ahead of 68.85. It is bullish momentum on the 12M USD/INR for revisit to 71.00-71.25 resist zone for quick completion of back-and-forth play at Strategic hedging (and trading) range of 68.75/69-71/71.25.

EUR/INR will be worst hit in the near/short term from combination of EUR/USD near term stability at 1.08-1.0950 and Rupee downside risk into/beyond 66.15-66.40. The set short-squeeze zone of 70.90-71.15 will go distant away with focus beyond 71.90 into 72.15-72.50, which would hold if DXY build steam for over 98-98.35 driving EUR/USD into lower end of set short term focus range of 1.0450/1.05-1.0950/1.10. All combined, retain focus at 71/71.35-72.50/72.85 with bias for end to end play.

Wish you all a very Happy Diwali.

Moses Harding

Gold Monetisation Scheme : Critical need, but will it work? Read on....

Solution to release of domestic capital and contain Current Account Deficit

It is obvious that huge accumulation of non-financial and unproductive asset in the form Gold has done more harm than good to the Indian economy, stock roughly estimated at around USD 1 Trillion. The impact is both direct and indirect on the CAD, Rupee exchange rate, inflation, monetary policy and permanent export of domestic capital. The economic value created from this activity (transfer of imported Gold to household jewellery and in the forms of coins/bars into safe deposit lockers) is miniscule compared to the significant damage caused through annual import of USD 50 billion.

The most critical structural woes on the Indian economy revolve around scarce domestic capital leading to higher dependence on external liquidity, import of non-essential goods leading to flight of domestic capital bridged through hot money FPI/repatriable inflows and downside pressure on Rupee exchange rate exerting upward pressure on the inflation and interest rate. The contribution from non-essential Gold imports contribute significantly to these structural woes on the system.

It is not that efforts have not been made to undo these adverse impact. Schemes to this effect are being launched and improvised since 1999, but most have failed for reasons attributed to the products and lack of appetite from the consumers. It is early to come to a conclusion (on the just rolled out schemes) that all will go well from here to reduce the high dependence on imported Gold for domestic consumption, but believe that the impact will be felt marginally in the initial stage before making a long term sustainable beneficial impact. The three schemes under the Gold Monetisation Scheme, 2015 have been rolled out with intent to unearth idle Gold (under Gold Deposit Scheme) for sale to MMTC for conversion into Gold Coins (Sovereign Gold Coins scheme) and sale to domestic wholesale consumers (Gold Metal Loan Scheme) and introduction of sovereign paper Gold asset (Sovereign Gold Bond Scheme) as alternate to physical holding. The coverage is complete, but what matters is the execution efficiency!

Gold Deposit/Metal Loan Scheme: Can it unearth household jewelry?

The product roll-out is with intent to unearth Gold assets lying idle (at household or lockers) in the form of jewellery or coins or biscuits or bars. These idle assets if deposited with nominated Banks will earn interest till maturity and redeemable either in cash or physical Gold. The supply (into Gold Deposit Scheme) will be from holders of household jewellery, investors holding Coins/Biscuits and others who hold bars as alternate to cash for whatever reasons. The demand (for Gold Metal Loan Scheme) will be from wholesale bullion dealers, large jewellery manufacturers and other manufacturers who use Gold as raw material. In the initial stage, significant stock from investors (held in the form of coins/biscuits) will flow into the deposit scheme to earn some interest on the idle asset. The issues revolve around attracting the household jewellery and high value bars held as alternate to cash. Having said this, coverage of even 10% of over all stock is a good beginning covering 2 years of import consumption. Will there be demand from consumers? Will locally refined BIS assayed quality be at par with hallmarked imported bars? The appetite for domestic refined bars as alternate to international quality is to be seen. But, the initial captive demand appetite from MMTC for making Gold Coins and to meet their import from domestic purchases from nominated Banks will be good enough to start with.

Sovereign Gold Coin Scheme: Reduce dependence of imported Gold Coins

The demand for Gold coins are now met through import from reputed foreign refineries. The supply of Sovereign Gold Coins through MMTC made out of bars acquired through Gold Deposit Scheme will cut the import bill of Gold Coins significantly, if not completely. It is not clear how other agents who are authorised to sell Gold coins will react, and the extent of competitive edge MMTC will have over other operators in the Gold Coin product.

Sovereign Gold Bond Scheme: Shift appetite from physical to paper Gold

The scheme is good (and convenient) for the investor community who treat Gold as alternate asset class along with equities, fixed income and opening up exposure on currency. The appetite however at this stage will be muted given the negative "carry" of around 6% against declining Gold prices, marginally compensated for from Rupee value adjustment to USD strength. Of late, Gold has lost its relevance as safe-haven investment to mitigate risks from inflation and extended risk-off mode on equity and fixed income assets. The demand for Gold from the younger generation (as investment product) is on the decline. The demand-supply dynamics is also not in favour of restoration of bull-trend of Gold in the near future. Despite all these risk factors against significant accumulation of capital through this scheme, consumption of imported physical Gold for investment purpose will be reduced.

Execution and extended reach is critical for success

The multi-product roll-out through Gold Monetisation Scheme is well conceived, but execution is very critical to achieve the desired objective. The execution phase involve extensive marketing, reach out to consumers of physical Gold (wholesale and retail) and immediate removal of irritants through constant improvisation. The consumers will look for quality and cost efficiency to be at par to what is available now from international vendors. The earlier scheme of 1999 has passed through 15 years of existence, and learning from this journey should make the 2015 scheme successful. The economic benefit is huge to stay less dependent on foreign capital, turn neutral on Current Account, to cut flight of domestic capital for non essential import consumption and ensure Rupee stability pulling in stable long term sustainable off-shore investments. The job creation from domestic refineries and other stake holders will lead to economic expansion. It is high priority agenda for a smooth journey ahead as India complete 25 years of economic liberalisation.

Moses Harding