India 10Y retains bullish undertone
India 10Y benchmark bond 8.40% 2024 traded to the script since previous RBI monetary policy; despite rate-pause (and SLR cut), support at 7.75% was rock-solid for push into lower-half of set near-term focus range of 7.65-7.75%. The bullish undertone is also evident from loss of traction with spike in US 10Y Treasury yield from below 1.60% to over 2.10%, thus squeezing the India-US yield spread from over 6% into 5.50-5.60%. What next?
RBI is under pressure to deliver the next 25 bps rate-cut before April monetary policy review date. January 2015 CPI print at 5.1% (against RBI expectation of 6%), and Rupee resilience to USD strength (against global currencies) & India-US yield squeeze are strong cues for RBI to ease Repo rate from 7.75% to 7.5% before end of FY15. RBI should "walk-the-talk" aligning the Repo rate with maximum spread of 2% over the CPI print to cut appetite on Gilts, and to enforce shift of excess SLR to productive credit. The expectation of best case scenario not beyond 7.35% will trigger this purpose (with Repo rate pause at 7.25%).
For now, it is time to review the near term focus at 7.50/7.60-7.70/7.75% with most trades at inner-ring till RBI rate-cut action. It is good to retain "long" entry at 7.75%, adding at 7.70-7.75% for 7.50-7.55% (ahead of 7.35%), tracking squeeze in India-US yield spread at 5.35-5.60%.
Have a great week ahead!
Moses Harding
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