Conflict between low growth and high inflation
It is more or less certain that it is going to be a long haul for Indian economy to get back into shape. The GDP growth is trending into lower end of 5.0-6.0% expectation while inflation will stay above 7% after adjustment of higher MSP and fuel price hike. The pressure on inflation will get aggrevated on uptrend in commodity prices and weak rupee. Rating downgrade will put currency and stock market under pressure. There are no positive take-away at this stage. This sets up strong case for RBI relaxing its grip on monetary policy. The expectation is for compromise formula between Mr.Chidambaram and Dr.Subba Rao based on committment of deliverables linked to addressing issues related to twin deficits and policy reforms.
There is hope for monetary easing in Q3 of FY13 (between October - December 2012). It may be in the form of rate cut or shift of system liquidity from deficit to surplus. It does not mean that it is going to be run-away rally in the Bond market. RBI will resort to SLR cut to keep supply side pressures in tact till inflation worries are out of the way.
10Y Bond (8.15% 2022):
We have already seen end-to-end moves within set short term range of 8.0-8.25% more than once. There is no reason to expect test/break either-way at this stage. However, in the near term (till trigger of monetary actions), trading range will be into the higher end, say 8.10-8.25%. There is concern on escalation in borrowing cost of the Government and it is possible that RBI will keep 8.25% in check through OMOs.
OIS market:
It is kind of stabilitty in OIS rates at 7.60-7.75% in 1Y and 6.90-7.15% in 5Y. We have already seen end-to-end moves within these ranges more than once. There are no strong factors to expect test/break either-way.
FX Premium:
We have already seen end-to-end moves within set short term ranges of 6.75-7.5% in 3M and 5.65-6.15% in 12M. We continue to look for consolidation within these ranges with test/break either-way not expected to sustain.
Moses Harding
It is more or less certain that it is going to be a long haul for Indian economy to get back into shape. The GDP growth is trending into lower end of 5.0-6.0% expectation while inflation will stay above 7% after adjustment of higher MSP and fuel price hike. The pressure on inflation will get aggrevated on uptrend in commodity prices and weak rupee. Rating downgrade will put currency and stock market under pressure. There are no positive take-away at this stage. This sets up strong case for RBI relaxing its grip on monetary policy. The expectation is for compromise formula between Mr.Chidambaram and Dr.Subba Rao based on committment of deliverables linked to addressing issues related to twin deficits and policy reforms.
There is hope for monetary easing in Q3 of FY13 (between October - December 2012). It may be in the form of rate cut or shift of system liquidity from deficit to surplus. It does not mean that it is going to be run-away rally in the Bond market. RBI will resort to SLR cut to keep supply side pressures in tact till inflation worries are out of the way.
10Y Bond (8.15% 2022):
We have already seen end-to-end moves within set short term range of 8.0-8.25% more than once. There is no reason to expect test/break either-way at this stage. However, in the near term (till trigger of monetary actions), trading range will be into the higher end, say 8.10-8.25%. There is concern on escalation in borrowing cost of the Government and it is possible that RBI will keep 8.25% in check through OMOs.
OIS market:
It is kind of stabilitty in OIS rates at 7.60-7.75% in 1Y and 6.90-7.15% in 5Y. We have already seen end-to-end moves within these ranges more than once. There are no strong factors to expect test/break either-way.
FX Premium:
We have already seen end-to-end moves within set short term ranges of 6.75-7.5% in 3M and 5.65-6.15% in 12M. We continue to look for consolidation within these ranges with test/break either-way not expected to sustain.
Moses Harding
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