India financial markets: Special update

What goes up in defiance to gravity can not hold for long!

India financial markets got support from all corners since mid 2014; domestic cues (across political, economic and monetary dynamics) are euphoric and external tailwinds (from liquidity and low commodity prices) are strong. If zoomed in to short term (since mid December 2014), markets had glorious run; NIFTY up by 13% (from 7961 to 8996) and BNF up by 19.5% (from 17502 to 20907). In the meanwhile, 10Y bond rallied from over 8.15% to 7.65% and Rupee up from 63.62 to 61.29. Needless to say, the dream-come-true rally defied fundamental gravity for push-back to adjust for ground reality. AAP emergence of power house in Delhi is just a reason to cause this adjustment. The worry is that the January 2015 euphoric rally in equity assets is mostly unwound;  BNF already below 2014 close of 18736 and at striking distance of 2015 low of 18211 (with push-back from 20907 to 18226) and NIFTY unwind from 8996 finding support above 8450, at distant away from 2014 close of 7961 and January 2015 low of 8065. Rupee is relatively resilient with unwind of intra-2015 rally from 63.62 to 61.29, finding support at 62.20. The best-in-class asset is the 10Y Gilts retaining stability at 7.65-7.75% despite blood everywhere. All taken, stakeholders got plenty in January to cover for the entire 2015, while it is pain for those who didn't take money off the table, and worse for those who tried to catch the greasy tail!

Nothing to panic, it is yet another opportunity for strategic play

India macroeconomic fundamentals stay positive (and solid) for Narendra Modi to script and build the scale up vision. The base is seen firm with GDP growth number over 7% (on revised methodology) and CAD outlook sharply down into 0-1% of GDP. Inflation and fiscal deficit expectation is not bad to trigger concerns. RBI is also expected to retain its baby-steps growth-supportive monetary stance. All taken, India sovereign rating upgrade is not distant away. The worry is from delay in delivery to the optimistic expectation from Modi; it is the impatience from the stake-holders (whose mindset is tuned to "fast-food" and e-commerce delivery speed) creates excessive (and make-or-break) price volatility. The 9 months of Modi regime is not spectacular on the ground, but effort (and intent) is splendid. There should be no regrets (on post-Modi re-rating on India assets since mid 2014) from value creation on NIFTY (up from 6650 to 9000) and BNF (up from 13000 to 21000). Modi will be seen under pressure for delivery (post Delhi election debacle), which is seen as good for the system. This should reflect in Budget 2015, to set up the next round of bullish momentum.

Equity assets not far away from cheap to acquire valuation zone

The expected correction in NIFTY from 9000 to 8600 extended into 8450 (low at 8470), and ditto in BNF from over 20650 into 18600 (low at 18226). The comfort however is from NIFTY consolidation at 8450-8650/8700 and BNF at 18200-19000. What next? There is nothing to panic as events ahead are positive; structural adjustment of over 50% of rally since mid-Dec'14 will stay resistant to extended correction below 8450 (NIFTY) and 18200 (BNF). It is prudent to stay positive ahead of Budget 2015, while awaiting sovereign rating upgrade in H1/FY16. For now, watch strong support at/above 8350-8420 with worst case not beyond 8185-8265, with firm resistance at 8735-8750 ahead of 8850-9000, short term resistance zone. There are no cues to review the set post-Budget 2015 big-picture at 8200/8450-9000/9300, while retaining focus on BNF at 18200-19600/20000.

Gilts seen in extended bullish consolidation mode

India 10Y bond stood firm at 7.65-7.75% despite strong headwinds around from bearish momentum on Equity & Currency and spike in US 10Y from 1.60% to 2.0%. There is also risk of slow-down in rate-cut pace going forward taking comfort from higher adjustment in GDP growth number (at over 7%). It is possible that monetary system will go into extended pause with Repo at 7.5%, covering one more 25 bps cut in April-June 2015. All taken, retain stability at 7.65-7.75/7.80%, break-out either-way not expected to sustain for now.

Rupee in comfort with most cues in support

Rupee in consolidation mode shifting focus between 61.20-61.35 and 62.20-62.35 in alignment with 12M $ at 65.50-65.65 and 66.50-66.65. Despite external woes (and resultant firm USD against global currencies), Rupee derives support from robust external inflows and elevated FX premium retaining forward market in $ supply driven mode. RBI did extend support to the $ at 61.20-61.35 and is expected to support the Rupee at 62.20-62.45 to retain Rupee price-stability, while the system is in the mode of attracting FDI flows. For now, retain focus at 61.45/61.70-62.20/62.45 in back-and-forth mode; LT break-out bias unchanged for Rupee recovery below 61.20 into 59.50-60.50. The long term hedging (and carry-trade) strategy is tuned to 12M $ range at 64.00/64.50-66.50/67.00.

EUR/INR is in consolidation mode post mid-Dec'14 fall from 80.00 to 68.17; recovery from here finds resistance at 71.00. While the short term tone is bearish for 65.00, prefer near-term consolidation at 68.00/68.50-72.00/72.50. Exporters with Euro receivables need to stay prepared for EUR/USD weakness below 1.11 (into 1.0650 ahead of parity) against USD/INR stability at 60-63.

Moses Harding