Balancing act with positive undertone
It would have been difficult for RBI to explain rate cut action. The recent stance was clearly anti-inflation; headline WPI print is stubbornly above 7.5% and expectations are not positive. But, there is need to respond to sudden (and unexpected) bold measures from the Government to address issues related to fiscal consolidation and policy paralysis. Even die-hard optimists did not expect such bold steps from the Government at this stage. RBI responded with token 25 bps CRR cut to mark its appreciation over Government action but the underlying message is that there is dilution in RBI’s stance on inflation and shift towards pro-growth is sighted.
This should not be seen as disappointment. The post-policy sell-off was not deep and should be seen as buying opportunity for those who missed the recent rally. The external cues are supportive of Indian assets till 2015 and there has been significant improvement in domestic cues. It is time to buy stocks; bonds and Rupee for significant appreciation by end of 2012. RBI’s action is seen as fair and pro-market given its tough task to balance growth-inflation dynamics.
What is the impact on the market? The shorter end of the rate curve will ease while maintaining stability in the medium to longer end. It would be good to invest in 10Y Bond on weakness into 8.15-8.25% (for 8.0-7.90%) and stay received in 5Y OIS at 7.20-7.25% (for 7.0-6.90%). USD/INR will find it hard to take out strong resistance at 54.15-54.25 (for 53.05-52.95) on strong downward pressure on USD Index to fall below strong support zone at 78.60-78.10 (for 74.75-72.75). Over all, there is nothing to get disappointed but to be seen as good opportunity to stay invested. It is party time for India despite suspect macroeconomic fundamentals, supported by strong tail winds from off-shore market. There is also certainty that momentum of the tail wind will stay into 2013-2014.
Moses Harding
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