The pent-up pressure on RBI Governor to cut policy rates on 2nd December 2014 gets diluted. The external liquidity over-hang (combined with rate cut hope) has already driven NIFTY from 7723 to 8365 and 10Y bond yield from 8.40% to touch below 8.20%. In the process asset valuation is seen to have shifted from cheap2acquire to hot2hold!
What next? While this dilution (and shift of rate cut expectation to Q4/FY15) will lead to gradual correction in NIFTY into lower end of pre & post policy focus zone of 8150/8200-8400/8500 and 10Y bond yield from 8.15-8.20% to 8.35-8.40%, it is temporary relief for spot Rupee for consolidation at 61.20-61.70 despite pent-up bullish momentum on the USD, and to retain end Dec'14 stability at 61.95-62.20 and end Mar'15 at 62.85-63.35.
Whatever may be the RBI action on 2nd December 2014, post-policy stability is seen at 8150/8200-8400; 8.15/8.20-8.35% and 61.20-61.70/61.95; break-out either-way will be tough2sustain! All taken, QE and liquidity (from Japan and Euro zone) driven rally will get diluted on FED shift from neutral to hawkish monetary policy tone (and guidance) into 2015.
Moses Harding
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