India markets: What Next?

India euphoria and appetite sky high!

Indian economy (and financial markets) can't get better support! The domestic euphoria is getting stronger with combination of NaMo credence and emergence of strong macroeconomic fundamentals. The external support from sustainability of Brent Crude at $40-60 through 2015 and abundant liquidity flow through 2015-2016 is strong catalyst to set up growth acceleration into (and beyond) 7.0-7.5% by 2017-2019. What more to ask for? India need not chase money, investors (and lenders) will chase India opportunities (and assets) to be part of the long term party with stretched visibility till 2019-2024.

Equity market in mark-time mode

NIFTY held at set intra-week buy zone of 8500-8535 (low at 8531) to hit Pre-ECB target at 8765-8800, before losing steam at post-ECB resistance zone of 8865-8900 (high at 8866) before all-time new daily/weekly close at 8835. The intra-Janauary 2015 pick-up from 8065 to 8866 by 10% at start of 2015 is beyond hoped for, to recover more than the 7.7% fall seen in December 2014 (from 8626 to 7961) in quick time! Bank NIFTY posted better performance at start of 2015 with 10.75% rally from 18211 to over 20000 (at 20167).

India outlook gets better with combination of ultra-strong supportive momentum from external sector and optimism into the Budget 2015. The signal from IMF that India will overtake China growth momentum by 2017 and ECB's €1.14 Trillion monetary stimulus are reasons to cheer and to stay over-weight on India equity into 2015 and beyond. There are no concerns whatsoever from FII appetite, as they have no where to go with limited options elsewhere. India equity looks better than the US (which is also looking good) given the emergence of Rupee as the strongest currency in the World. There is no option for domestic retail and wholesale investors but to stay with the bullish trend given the limited upside in Fixed Income Bonds assets. All taken, there is no serious downside risks on India equity market. The only risk is for move into consolidation phase on run upto Budget 2015. The global fundamental risk from de-growth and deflation is adequately covered by liquidity-push factors and India optimism as catalyst to the long term bullish undertone. The near term focus range for NIFTY is already reviewed at 8750-9000 (from earlier 8450-8700) with bias for extension into 9300, seen as end FY15 target. The minor support at 8785-8800 has held firm with previous weekly close at 8835, but not sure as yet to look for beyond 9000 this week. It is prudent to allow bit of consolidation (to digest the 10% rally since 7th January 2015) at 8750/8785-8965/9000 before gaining steam for beyond 9000 into 9300. The strategy is to retain entry at 8785-8800 and add at 8750-8785 with tight stop for 8965-9000. Bank NIFTY is now supported at 19850-20000 for 20500/20650 in back-and-forth mode.

Gilts in extended consolidation phase

10Y bond 8.40% 2024 is in sideways mode at 7.65-7.75% with no strong cues to trigger break-out either-way, while India-US bond spread in back-and-forth mode at 5.70-5.95%. Most cues continue to stay in favour of short/medium term bullish extension below 7.65% into 7.35-7.50% on delivery of next rate cut post-Budget 2015 or in April policy review meeting, while domestic and external appetite stay solid to absorb weakness beyond 7.75%. There is no risk of squeeze in India-US 10Y bond spread given the consolidation of US 10Y at 1.75-1.90%. All taken, retain consolidation mode at 7.65-7.75% with overshoot limited at 7.60-7.80%. Retain strategy to trade end-to-end and stay invested for shift of focus into 7.40-7.55% by (or before) April 2015.

Rupee retain strength against global currencies

Rupee traded perfect to the script, intra-week push-back held dot at 62.20 with  recovery held at 61.35-61.45 (finding resistance from 12M $ support at 65.50-65.75 on short-squeeze $ demand through unwind of short entry at 68.00-68.50 + time-decay). Rupee rally against Euro and GBP was more significant; EUR/INR pushed down from 72.00-72.50 to below 68.50 and GBP/INR from 94.50-95.00 to below 92.00. Most cues continue to stay in favour of Rupee from abundant FII supplies and elevated FX premium at 8.0-7.0% across 3-12M tenor. The one-way Rupee gain is arrested to an extent by take-profit short $ squeeze and RBI bids, while importers out of sight.

Now that Rupee has recovered beyond the recent fall from 61.70-61.80 to 63.80-63.90, focus is pulled towards 58.35 (reversal point of recovery from all-time low of 68.85) with immediate target at 60.65 on break below 61.10-61.35 resistance zone. The trading range for the week is set at 60.50/60.65-61.50/61.65; strategy is to retain the two-stage short $ entry at 62.20 and follow-on at 61.70 for take profit at 60.60-60.70, while tracking 12M USD/INR at 64.75/65.00-65.75/66.00 with bias into lower end. The risk to this expectation can only be from RBI adding to usual month end $ demand, but risk can't go beyond 61.70-62.20.

Have a great week ahead!

Moses Harding