RBI rate-cut not a surprise and well-timed to arrest euphoria dilution
Market Pulse asked for 25 bps rate-cut ahead of Holi festival and RBI obliged, seeing merit in the demand! While the rate-cut (before 7th April policy review date) was surprise to many, what is more intriguing is the post-action sell off across asset classes despite being a pleasant surprise! I would consider the rate-cut as best-timed, as prevention act rather than cure, and as an exhibit to all stakeholders that the Government and RBI stay in the same pitch (and wave length) to work on fiscal & monetary dynamics to stay stimulus to growth, diluting growth-inflation conflicts. There is lot of noise around Budget'15 not meeting the FY16 fiscal deficit target of 3.6%; higher estimate at 3.9% against aggressive growth target of 8.1-8.6% is seen as major risk in play. This worry, along with tight money (and liquidity) conditions in March was putting pressure on markets; rate-cut came in to arrest sharp push-back, and to extend stability in financial markets ahead of end FY15. But for this rate-cut, NIFTY would have already gone weak below 8450, Rupee into 63 and 10Y bond yield over 7.85%. Thank you for the good thinking, Governor Rajan. The positive take-away is the emergence of common agenda (between the FM and RBI) to manage growth-inflation dynamics to enable monetary policy to stay supportive to consumption and investment.
Global cues stay supportive to India optimism
Global markets have already shifted from risk-off to risk-on mode driven by liquidity over-hang, near zero returns for extended period on risk-off assets and signs of improvements in growth against comfort on ease in disinflationary pressure. DJIA has already shifted base from 16850-17000 to 17500-17650 (with resistance now at 18350/18500), pushing the US 10Y yield up from 1.50-1.65% to over 2.15% (on risk of FED start of rate-hike cycle from June-September 2015), and diluting investor appetite on Gold with push-back from $1285-1310 to 1160-1185. Brent recovery from $45-46 into $63-65 is also looked positive and win-win for all. While strong favourable interest rate play pushed $ higher (DXY from 80 into 97.50-100), impact on emerging markets currencies has not turned spoilsport with minimal impact on the Indian Rupee. All taken, existing supportive global tailwinds is there to stay in steady mode, awaiting FED stance on interest rate moves.
India medium term outlook stays positive with minor concerns in the short term
Both Railway & Union Budget 2015 has set up road map for FY16-FY19 and if the set targets are achieved, it would lead to second term for Narendra Modi for extended term for 2019-2024 and beyond; so, it is a "survive-or-perish" period for Modi Government. This sets up strong intent (and personal agenda) to exceed expectations, hence there is no doubt whatsoever on the all out efforts that would be put to achieve targets. It would be survival of the fittest period for the team members of Modi. The FY16 agenda on BFSI and infrastructure sectors is step in the right direction. This will set up strong base to script the "Make-in (for)-India" agenda to scale up capacity on manufacturing and agriculture sectors. All these will lead to fiscal prudence giving deep pockets to spend for social well-being. The strategy is commendable and looks great on paper, and building tactical solutions is work-in-progress; concerns remain on execution capabilities and if these doubts are removed in FY16, it will be a great bull ride into FY17-FY19 and beyond!
India equity market in bullish consolidation mode
NIFTY has been in roller-coaster ride between 8450 to 9150 since 30th January with 8996 to 8470 to 8913 to 8669 to 9119 before close around mid-point of set post-Budget trading range of 8700/8750-9150/9200. The major comfort is from lift of long term strategic base to 8650-8750 with firm resistance now at 9150-9250. If the 12 month re-rating (of over 50%) since February 2014 from 5900 to current (8900) is carried through FY16 with another 10-12% top-up into 9800-10000, it would be good job done! For this, steady improvement in macroeconomic fundamentals need to become visible to stay in comfort to avoid trigger of profit-booking. There will be good appetite from domestic investors given limited upside in Fixed Income assets, while foreign monies continue to chase mix of valuation gains (in equity and bonds) and "carry" advantage from Rupee stability. For now, retain strategic buy zone at 8700-8750 (risk only below 8650-8700 for 8450 before strongly up), but not yet sure of sustainability beyond 9150-9250. FED and Global rating agencies hold the trigger for back into bullish rhythm beyond 9150-9250.
Bank NIFTY has lead from the front with 100% re-rating since February 2014 from below 10000 to over 20000. It has been more volatile during the pre-budget 2015 to post rate-cut period with 20907 to 18226 to 19532 to 18489 to 20541 before stability at 19350/19450-19900/20000. The good thing is that volatility is limited at set strategic focus zone of 18200/18450-20450/20650. For now, see support at 19000-19150 with strong resistance at 20000-20150 ahead of 20500-20650 while the recent peak of 20907 expected to stay safe through FY16 with sideways mode at 18400/18650-20650/20900 in the short term till next round of rate-cut. Banks will be under earnings pressure in FY16 (to match high valuation) against limited upside on Investment portfolio, higher provisions and limited visibility on credit pick-up.
All taken, stakeholders need to see sustainable improvement to achieve (and surpass) set FY16 GDP growth target at 8.0-8.5% to provide comfort on fiscal deficit at 3.6-3.9%, while worries on inflation and CAD are behind. There is nothing to panic at this stage, and good to stay in back-and-forth mode in NIFTY at 8700-9200 and Bank NIFTY at 19000-21000.
India Bond market is good with limited upside
The beneficial impact of ahead-of-schedule rate-cut on 10Y bond is shift of focus from 7.75-7.85% to 7.60-7.75%, building for tenor premium over the overnight base rate of 7.5%. From here, the expectation is for another 25-50 bps rate-cut between June-December 2015 subject to achievement of growth-fiscal prudence conditions. While CPI stability around 5% can be taken as granted, issues revolve around fiscal prudence and FED monetary policy stance. Both these factors are seen as risk in play for rate pause till June 2015; beyond there, there is no clarity on either extended rate pause till end of 2015 or another 25-50 bps rate-cut. The worst case of steady Repo at 7.5% will guide stability in 10Y bond at 7.65-7.80% and best case scenario at 7.35-7.50% on shift of Repo rate to 7.0-7.25%. There are no cues in favour to expect shift of operating policy rate from Repo to Reverse Repo rate in FY16. The squeeze in the India-US 10Y yield spread at 5.50-5.60% is risk on India 10Y bond with firm resistance at 7.65-7.75% on US 10Y stability around 2.25% (for 7.65/7.75-7.85% consolidation).
The strategy ahead is straight forward; unwind 10Y benchmark 8.40% 2024 at 7.65-7.70% awaiting new 10Y bond in April with coupon at 7.55-7.65%. While strategic unwind happens at/below 7.70%, traders appetite will be seen at/above 7.80-7.85% for last-mile chase into 7.65% to guide stability at 7.70-7.85% till the new 10Y benchmark bond comes into play.
Rupee strong on time-decay adjusted basis
Rupee has been in back-and-forth play at 61.25/61.35-62.35/62.45; importers (and RBI) lend support for the $ at set lower end to cover near/short term imports at forward value below 61.85-62.35 and exporters (and carry-trade) appetite good at higher end to sell 12M $ at forward value at/above 66.85-67.00. This hedge strategy has helped to provide Rupee exchange rate stability with RBI in readiness to arrest excessive moves either-way.
What next? Most cues continue to stay supportive to Rupee; major risk is from strong $ (against global currencies) and comfort from robust off-shore flows and elevated FX premium. While most wish for REER linked Rupee depreciation (to support exports), demand-supply dynamics continue to be in favour of Rupee and RBI in $ buy-mode to provide equilibrium. Adjusting for part of time-decay, focus is now at 61.50/61.65-62.35/62.50 with unchanged hedging strategy; importers hedging near/short term $ payables at forward value of 62.00-62.50 and exporters covering medium/long term $ receivables while 12M at/above 67.00-67.15. All taken, USD/INR stability at 61/61.50-62.50/63 is win-win (and acceptable) to all stake-holders. At this stage squeeze in India-US rate differential is not seen as major risk on Rupee against the elevated 1-12M FX premium.
EUR/INR push-back from 71.00-71.25 has stretched beyond major support at 68.00-68.25 driving the EUR/USD from 1.1450-1.1550 into 1.07-1.10 against USD/INR pull-back from 61.55-61.70 to 62.35-62.50. With the kind of sharp fall from 80 to below 68 since mid December 2014 (in 3 months), prefer stability at 65-70 (against EUR/USD at 1.05-1.10 and USD/INR at 62-62.50/63); stay neutral on break-out bias, not ruling out concerted Central Banks intervention to prevent extended bull-run in #DXY beyond 97.50-100.
Moses Harding
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