RBI jitters diluted by FOMC comfort
India financial markets has recovered around 50% of post 2nd June RBI monetary policy crash, and in consolidation mode taking comforting cues from the FOMC guidance. MARKET PULSE set pre & post policy focus in NIFTY at 7965/8000-8465/8500 and in Bank NIFTY at 17100/17350-18700/18850. Since then, NIFTY is down from 8467 to 7940 for gradual recovery from there into 8200-8250. Bank NIFTY took a bigger hit for crash from 18832 to 17174 for gradual pick up into 17800-17950.
10Y bond yield was hit hard for sharp reversal from 7.62-7.65% to 7.90-7.93%; but for the support from the "invisible hand", the damage would have been worse. FOMC rescue act has brought relief for recovery into 7.72-7.75%.
Rupee also took the heat for push down from 63.58 to 64.30 before post FOMC recovery into 63.65-63.70.
So, combination of RBI and FOMC monetary stance has removed the pain for cheer into the near term. But, given the short term downside risks in the radar, how far the cheer recovery could extend is the million-dollar question?
Most cues neutral and mixed, hence neutral bias on the way forward
NIFTY held at bearish make-or-break zone of 7935/7950-8000, shifting focus at bullish make-or-break zone of 8200-8250/8265. So is Bank Nifty from 17150/17200-17350 to 17850-18000/18050. The domestic cues have brought relief with better than expected monsoon. But this comfort may not be good to expect another 25 bps rate cut from RBI in 2015, when CPI inflation print is expected to inch towards 5.5-6.0% and not into 4.5-5.0%. It is less said the better on the pick up in growth momentum. While there is near term comfort from FOMC, short term outlook is not positive to India financial markets. Given this outlook, directional bias in NIFTY from 8200-8250/8265 is not clear whether into 8435/8450-8485 or 7935/7950-7985. So is BNF from 17850-18000/18050 for 17150/17200-17350 or 18650/18700-18850. What is the strategy here? The current levels are at midpoint of the set near term (from now to end July) focus range of 7935/7950-8485/8500 in NIFTY and 17150/17200-18800/18850 in BNF, setting up high risk - low reward trade either-way with not more than 1:1 risk-reward. The prudent option is to close long position at current and retain close watch on make-or-break zone of 8200-8250/8265 and 17850-18000/18050. The prudent low risk - high reward trading strategy is to "short" here, add on break of 8185/17750 or with stop/reverse on 8265/18050 break (with stop below 8200/17850). It is not yet the good time for strategic investors who can await set up of short term weakness below 7935-7950 (and 17150-17200) for 7500-7650 (and 16000-16400).
India 10Y make-or-break zone is at 7.72/7.75-7.77% post recovery from 7.88-7.90/7.93% support zone. Here, clarity is seen to be relatively better. There are no cues ahead to support 10Y benchmark to trade at premium below 7.72% given the existence of strong domestic headwinds and emergence of external headwinds beyond near term. Given the short term US 10Y yield stability at 2.20/2.35-2.60/2.85% against Rupee pressure into 64.50-66.50, the probability of India 10Y yield spike into 7.90% and beyond is high. Even in the unexpected event of RBI delivering the final round of 25 bps cut ahead of FED rate hike, the beneficial impact on 10Y yield may not be below 7.72% (and best case not beyond 7.65-7.67%) given the huge pipeline supplies against low investor appetite. The strategy therefore is to cut duration of the investment portfolio at 7.72-7.75/7.77% for duration build at or above 7.88/7.90-7.93%.
USD/INR make-or-break zone is at firm strategic support zone of 63.45/63.60-63.70. With huge RBI appetite here to build reserves (before $ supplies dry up in the short term) and bullish momentum on #DXY against base at 93.00-93.25 for bullish pick up beyond 96.50 into 98-100.50, downside risks on Rupee is high in the absence of FPI supply support. The probability of Rupee weakness beyond near term support of 64.20-64.35 is high for 64.65-65.00 before shift of short/medium term trading focus at 64.50/65-66.50/67 (between August to December 2015). The relief however will be from #DXY extended weakness below 93 (into 90), in which case Rupee recovery may not extend below 63.20-63.45. Hence, risk-reward for staying "short dollars" (through unhedged $ liabilities) will not be in favour with limited upside and not quantifiable downside risks.
All combined, market stakeholders are confused on risk position at current levels; either to stay risk-on for extension of recovery into set higher ends seen on 2nd June RBI policy day (or ride the unwind of recent recovery into the lower end seen in the previous week) or stay risk-neutral with appetite to add on recovery into the higher end (or reversal into the lower end) or stay risk-off to act on break of set make-or-break zone either-way. You are the best judge for appropriate positioning considering the size of your pocket!
Good luck!
Moses Harding
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