Domestic cues: wait-and-watch mode
Governor Rajan has set the road map ahead for next round of rate action. The attention will be on January-March 2015 CPI print and fiscal deficit achievement for FY15 and target for FY16. Given the set benchmark of 1.5-2% spread between Repo rate and CPI print, the next rate cut is dependent on CPI print ease below 5.5% with benign expectation into 4-5% in FY16. This is not enough; FY15 fiscal deficit has to stay below 4.1% of GDP with FY16 estimate at/below 3.6%. In all probability, next rate action is seen to be distant away in April monetary policy review meeting, and not immediately post Budget 2015.
Global cues: risk-neutral mode
The pent-up bearish undertone on developed markets is seen to have diluted, and into consolidation mode; DJIA seen in comfort at 17000/17100-17600/18100, US 10Y Treasury yield at 1.50/1.60-1.90/2.0% and DXY losing steam over 95 for push-back into 93.50. Brent recovery from $45 into 55-60 and Gold losing shine at 1300-1310 for unwind into 1250-1260 are positive signals for shift from risk-off to risk-neutral mode. All taken, impact from global cues on India financial markets may not be significant to cause worry.
Gilts yield adjust to zero carry
Combination of rate-pause and 50 bps SLR cut has shifted focus in 10Y Bond yield from 7.65% to 7.75%. Most cues remain firm to retain short term trading range at 7.45/7.50-7.75%, valid till end June 2015. Liquidity will be in plenty with RBI in $ buy mode (in support of $ at 61.10-61.35) releasing Rupees into the system. Despite excess baggage, DII/FII appetite for Gilts will be in plenty at/over 7.75% for over 13% annualised yield play from now to June 2015. All taken, see near-term (upto Budget 2015) price-stability at 7.65/7.70-7.75% (for zero-carry at Repo/CBLO counter); break-out either-way not to sustain.
Equity assets in consolidation mode
NIFTY complete back-and-forth mode within the set pre & post policy range of 8750-9000 (with 8727 to 8996 to 8726 moves); expected fill up of gap at 8727/8761-8827 is done. What next? The long term bullish undertone is intact; uncertainty is from extent of bullish consolidation with immediate support at 8750-8775 ahead of major one at 8600-8650, which should hold to retain bullish rhythm. On the other side, see major near term resistance at 8830-8865, ahead of Budget 2015. For now, set focus at 8650/8725-8825/8900 for back-and-forth play, break-out either-way is tough to sustain. Strategic players (post exit at 8965-9000) can reinstate book at 8725/8675/8625 (stop below 8600) for 8965-9000 revisit by April-June 2015. Combination of domestic optimism and dilution of bearish momentum in external sector is good to retain long-term focus at 8600/8650-9000/9300.
Bank NIFTY is sharply down from below 21000 to 19100, adjusting for stretched valuation, and now at gap-up zone of 15th January 2015 at 18600-19350 with major support at 2015 low of 18211 and mid Dec'14 low of 17502. For now, set focus at 18600/18800-19800/20000 in consolidation mode, retaining long term bullish momentum into 20650-21000.
Rupee in administered regime by RBI
Rupee retain its strong bullish rhythm post sharp recovery from January 2015 low of 63.62 to 61.29, before consolidation at 61.50-62.00. Most cues stay in favour of Rupee from economic and monetary dynamics, with RBI in standby to maintain demand-supply equilibrium, now seen at 61.20/61.35-62.05/62.20. With abundant FII appetite and supply driven mode in the forward market, bias is on extended Rupee recovery below 61.10, RBI willing into 60.50 ahead of 59.50. The spike in 12M FX premium from 6.85% to 7.10% post-policy stay as catalyst to Rupee bullish undertone. The hedge play in 12M $ at 65.50-66.50 add to spot stability at 61.20-62.10 till shift of focus on spot move below 61.10 into 59.50-60.50 (12M $ at 63.50-64.50). All taken, importers can stay in comfort (risk only above 62.10-62.35) while exporters seen in hurry absorbing temporary weakness into 61.95-62.20.
EUR/INR recovery from 68.00-68.50 has met set target at 70.50-71.00 on the back of EUR/USD back-and-forth mode at set NT focus range of 1.11-1.1450. While USD/INR outlook gives comfort to short the EUR/INR, extent of EUR/USD extended recovery beyond 1.1450-1.1475 is uncertain, hence need to stay in caution for fleet-footed play. However for strategic hedge play, it is good to sell EUR/INR at/above 71.00 chasing the short term bearish undertone on the EUR/USD below 1.11 into 1.0750 (EUR/INR at 65.50-66.50 against spot USD/INR at 61-62).
Moses Harding
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