Sensible reaction from RBI but markets high on euophoria!

Balanced approach on playing to the gallery:

No surprise from Governor Rajan who was not expected to deliver cuts in policy rates against pressure for markets; not playing to the gallery is wise decision. Surprise is that of significant dilution in RBI's cautious tone, thus building certainty of rate cut before end of FY15; confirmation to the gallery that action is round the corner is sensible one. RBI's monetary action and post-policy price-stability is to expectation. As always, RBI has its attention firm on inflation and fiscal deficit; positive take-away is downward revision in CPI at 6% and no major risk on fiscal slippage in FY15. All taken, RBI has better comfort on inflation and twin-deficits which are considered as major risk to growth than tight liquidity and elevated interest rates!

Minimal impact on markets:

The view of MARKET PULSE was post-policy price-stability, whatever may be the policy decision. The two extremes of extended bull-run and deep correction (or reversal) was not preferred. The expectation was for short term price stability within the extreme levels seen on run upto policy.

NIFTY failure above 8585-8600 was as per script and correction from over 8600 was expected to hold firm at 8450 for 8450-8600 sideways play. At this stage, overshoot either-way is not expected to sustain. It is now seen certain that long-term strategic base is lifted up from 7700-7750 to 8150-8200 for rally beyond 8600 in 2015, taking the focus into 9500 with 10% value re-rating. Given this outlook, strategic investors who chased the move from 7700-7750 into 8600 should reinstate at 8150-8400/8450 for next phase of chase over 8600. All taken, cues are in favour over long term, while near/short term momentum will prepare for value-adjustment from hot-to-hold to cheap-to-acquire which is good for shift into bullish gear. For now, rest of 2014 trading range is set at 8150/8400-8600/8650 and prefer sideways play at the inner-ring; will be surprised to see sustainability of overshoot either-way!

10Y bond rallied to 8.0% to complete the back-and-forth chase from 8.40% to 8.65% to 8.0% since the issuance of 8.40% 2024 new 10Y benchmark security. Now, the game is over as it is not seen prudent to chase extended rally below 8%, not withstanding the delivery of 25-50 bps rate cut in Q1/2015. The structural woes from demand-supply dynamics remain valid to limit gains beyond 8.0%. Retain set short-term price-stability at 8.0-8.15/8.20%; overshoot either-way not expected to sustain for now.

It is near term relief for Rupee to extend protection at 62.20-62.25 to retain focus at 61.70-62.20 into end 2014. Given the outlook of 2014 close at 62.20-62.35, spot USD/INR price-actions would stay in alignment adjusting for time-decay. All taken, short term price-stability is preferred, with rest of FY15 outlook at 61.60/61.85-62.85/63.35. Hedging strategy to stay aligned with end Dec'14 USD/INR spot at 62.10-62.35 and end Mar'15 at 63.10-63.60.

Moses Harding