What next in India Financial markets?

Roller-coaster ride in Equity market from end of FY15

MARKET PULSE end of FY15 strategy was to close equity investment book while Sensex above Mount 30K and NIFTY over 9K. The euphoria driven rally (since May 2014) largely driven by FPI investors was seen stretched, and staying invested over here was not backed by fundamentals (and valuation) support. The strategy, therefore was to take money off the table, ahead of bearish consolidation in H1/FY16. The outlook was to allow reversal into strategic base (and cheap2acquire) in NIFTY at 7950-8100 from hot2hold zone of 9000-9150. Bank NIFTY was seen to be extra stretched at 20650-21000 for reversal into strategic base at 17250-17600. The reversal from March'15 peak (NIFTY at 9119 and Bank NIFTY at 20907) established bearish consolidation in May'15 at lower-half of set strategic focus in NIFTY at 7950/8000-8500/8550 and in BNF at 17250/17400-18850/19000. Post the intra-May back-and-forth in NIFTY at 7997 to 8489 to 8270 to 8443 (close at 8433) and BNF at 17246 to 18755 to 18226 to 18751 (close at 18721), the undertone ahead of 2nd June monetary policy is neutral.

Domestic cues to set up directional bias, while global impact stay mixed and neutral

India Equity assets valuation priced-in most positive cues ahead, and the current bearish consolidation covers most of disappointment and dilution in euphoria. There is concern on FPI appetite from unwind of intra-2015 gains in India while other markets have done significantly better on exchange rate adjusted basis. All taken, combination of domestic and external cues do not suggest clarity on short term directional bias. MARKET PULSE outlook for rest of H1/FY16 (ahead of FED start of rate-hike cycle in Q4/2015) is mixed between neutral and bearish consolidation. The outlook now is for post policy bearish consolidation in NIFTY at 7950/8000-8500/8550 (BNF at 17250/17400-18850/19000) or shift into neutral consolidation at 8250/8300-8800/8850 (BNF at 18100/18250-19600/19750). RBI policy actions hold the trigger ahead; given the choice between 25 bps rate cut (with cautious guidance) and rate pause (with neutral wait-and-watch guidance), see post policy sideways mode in NIFTY at 8250/8285-8515/8550 and BNF at 18100/18200-18900/19000. Retain neutral bias on break-out in NIFTY within 7950/8000-8800/8850 and BNF at 17250/17400-19600/19750. Strategic investors continue to watch NIFTY at 8000 (BNF at 17250) as good entry point for revisit to 9000-9150 (and 20650-21000) in H2/FY16. Over all, retain NIFTY rest of 2015 big picture at 7950/8100-9000/9150, overshoot either way may not sustain for long.

India 10Y bond has limited upside potential in H1/FY16

The big play in India 10Y Gilt (8.40% 2024) rally from over 8.65% was done at below 7.65%. The new 10Y bench mark has since recovered from 7.72% coupon cut-off yield to 7.63-7.65%. Most cues ahead such as Repo rate stability at 7.25-7.50% in H1/FY16,  India-US 10Y yield spread base at 5.50%, Rupee pressure into 65-68 and excess of Gilts supply over demand will limit gains at 7.55-7.65% for push back into 7.80-7.90%. It is good for Banks to cut the duration of the SLR book through switch from longer end (10Y & beyond) to shorter end (up to 2 years). The post policy outlook on 10Y Gilt 7.72% 2025 is at 7.65-7.80%, overshoot not beyond 7.55-7.90%. The impact from US 10Y yield is mixed, which has been volatile at 1.85-2.35% and now steady around the mid point. While the impact from ease in 10Y below 2.10% will be limited, spike into 2.35% will be extended weakness here. All combined, it is high risk to stay "long" at 7.55-7.65% and stay in cash for good value entry at 7.80-7.90% for H2/FY16 consolidation at 7.50-7.65%.

Rupee under pressure from USD strength with RBI on the bid

USD/INR has already shifted short term strategic focus at 63.35/63.60-64.60/64.85, setting up firm base for end June'15 at 63.95-64.10 and 12M at 67.95-68.10. The bullish pick up from 61.65-62.15 base to 64.20-64.35 (end May'15 $ resistance at 64.35-64.50) was swift before RBI restoring spot stability at 63.45-63.95. What next? Rupee will continue to stay under administered pressure, building traction with DXY bullish momentum into 98.50-100 and RBI $ bids cutting the traction on DXY push back into 95-96.50. The combination of reduction in FPI flows, importer's lead against exporter's lag and the need to retain Rupee competitive for exports and FDI flows will retain bias into 64.60-64.85 (end June'15 $ focus range at 64-65). Retain hedging strategy at end June'15 $ at 63.95/64.10-64.85/65.00 and 12M USD/INR at 67.95/68.10-68.95/69.10.

EUR/INR impact neutral from weak Euro and Rupee pressure

EUR/INR reversal from 73.00-73.25 held at upper end of 68.50-69.50 before consolidation at 69.50-70.50. The outlook on EUR/USD is for near term consolidation at 1.07/1.0850-1.10/1.1150 and USD/INR at 63.45/63.70-64.60/64.85. This sets up consolidation play at 69/69.50-70.50/71.00 with neutral bias on break-out either way.

Good luck and have a great week ahead!

Moses Harding