Bullish momentum restored in equity market:
Post the back-and-forth moves between 8626 to 7961 to 8445 to 8065, NIFTY settles down at 8435-8535. The trigger for these volatile both-ways swing is based on the strategy to buy "corrective-dips" to stay invested on India optimism and "sell-on-recovery" to stay clear of external weakness. All taken, NIFTY at 7950-8100 was seen as "cheap-to-acquire" valuation, while at 8450-8625 was "hot-to-hold" building more downside risks! This strategy which was put to execution post 3rd December 2014 RBI monetary policy has paid rich dividend in quick time.
What next? The India optimism has now gained momentum with start of rate-cut cycle; expectation of immediate rate-cut has been delivered, as RBI didn't have any reason to delay any further post the triggers from steady Brent Crude at $45-50, favourable trending in CPI and CAD beyond RBI expectation, strong assurance from the FM on fiscal prudence, Rupee unwind of bearish momentum from 63.88 to below 62.70, and above all strong decline in US 10Y Treasury yield below 2% into 1.70-1.80% on expectation of delay in shift to rate-hike cycle by FED. The outlook now is for delivery of (post-budget) 25 bps rate-cut on or before April 2015 monetary policy, and if all goes well another couple of baby-steps cut before end of 2015 for shift of operating policy rate from current 7.75% to 7.0%. While domestic cues are solid for sustainability of bullish undertone, the uncertainty is from external cues which look weak, fragile and nervous. Having said this, optimism from the US economy and FII/FDI appetite for India (in the absence of better opportunities elsewhere) will play a major role to mitigate risks from external sector. All combined, strong domestic tailwinds and safe-haven appetite of external investors will retain the bullish rhythm (and trend) into 2015 with NIFTY target at 9500-10000. It should also be kept in mind that it would not be a straight-line upward journey; moves will be back-and-forth with lift of "base" going forward!
The immediate support for NIFTY is at 8435-8450 to provide near-term bullish consolidation at 8400-8650, with bias into higher end. There is high probability of punch of new high over 8626, but sustainability of the same is doubtful on profit-booking offers from both domestic and foreign institutional investors. For the week, good to retain focus at 8400/8435-8615/8650 with overshoot bias for shift into higher trading range at 8585/8635-8935/8985 on run upto Budget 2015. Bank NIFTY has set firm base at 18950-19100 with sight beyond 19400 into 20000. The strategy is to buy the trend (absorbing corrective dips) and play the counter trend by selling (at higher end with stop/reverse) to catch the 3-5% retracement moves. By playing both sides, it would be great repeat reward for 2015.
Gilts in sideways mode before next round of appreciation:
The strategic (since issuance) play on 8.40% 2024 (from 8.35-8.40% to 8.60-8.65% to 7.65-7.70%) is done! What next? Positive first, pipe-line rate-cut hope ahead will extend support and limit downside risks. The negative is from structural adjustment of the SLR investment book and shift of FII appetite from Gilts to equity assets, going forward. There will be another net supply of around Rs.5 Trillion from FY16 Government borrowing programme. All taken, demand-supply dynamics will not stay supportive to Gilts for run-away gains from here. Building on shift of policy rate from 7.75 to 7.0-7.25% by end 2015, 10Y benchmark Gilt yield can stretch at best to 7.35-7.50%; thereafter, significant gains can only be from shift of operating policy rate from Repo to R/R rate giving 1% advantage; this will be too much of an expectation till FY16, and would go out of focus if FED gets into rate-hike mode by then. All combined, short term stability in India 10Y bond is seen at 7.65-7.80% with shift of focus to 7.50-7.65% on delivery of next round of 25 bps cut in April'15. This is not a great play for FIIs and strategic investors, who will shift appetite to equity which is seen to deliver attractive returns in 2015. For now, it is good to stay tuned to 7.65-7.80% with neutral break-out bias tracking India-US 10Y bond spread at 5.65/5.70-5.95/6.0%. Now, with elevated spread at 5.90-6.0%, India 10Y bond has firm support at 7.73-7.75% with risk build-up into/over 7.80% on reversal of US 10Y Treasury yield from 1.70 to 1.95%. It is good to play end-to-end of 7.65-7.80% till the next round rate-cut comes into focus.
Rupee recovery mode intact while RBI stay easy in absorbing FII flows:
Post the back-and-forth moves in 2014 between 58.35 and 63.90, Rupee recovery below 62.70 at start of 2015 is relief. At 63.75-63.90, most feared risk of 68-70 (to be with bullish DXY), but the turn was violent the other way below 61.70-61.80 with a punch at 61.48 before consolidation at 61.80-62.20. Over all, it was perfect execution of the script trading back-and-forth of 61.70-61.80 and 63.75-63.85, at break-neck speed! What next? Rupee has emerged as the strongest of all with most (if not all) cues in favour. The major risk factors from high CAD and FII reverse flow are not relevant now, as CAD is trending down below 2% while FIIs increase India appetite with limited options elsewhere. Despite rate-cut, FX premium at 7.50-6.75% across 3-12M tenor is seen attractive for exporters. All combined, both cash and forward market will stay in supply driven mode. The only concern is the extent of RBI presence on the $ bid (while DXY in extended bull phase over 92.50-92.65) to retain Rupee exchange rate not far away from REER! The immediate firm support for Rupee is at 62.05-62.40 with minor resistance at 61.45-61.70; bias is for build up of Rupee bullish momentum for unwind of 58.35 to 63.90 weakness (seen in 2014) with ST target at 60.45/59.60. The risk to this view could only be from external bolt from the blue, seen as low probability with diluted impact, if at all! All taken, it is good to retain the fresh short $ initiation at 61.95-62.20 (post back-and-forth trade between 61.70-61.80 and 63.75-63.85) and add at 62.20-62.70 (with stop at 62.75) for 60.00-60.50. The hedging strategy can stay tuned to 60-63 consolidation (12M USD/INR at 64-67).
Moses Harding
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