Delivered to expectation but chose the wrong choice
MARKET PULSE ruled out 50 bps rate cut and CRR cut, and the choice was between 25 bps rate cut (with hawkish guidance) or rate pause (with neutral to positive guidance). It was seen good to get optimistic guidance, if not dovish (instead of rate cut + nervous pessimistic guidance) to retain post-policy price-stability in neutral undertone. But, it turned out to be shocker of a delivery!
It was evident that RBI was finding it difficult to defend rate cut against shift of January 2016 CPI target from 5.8% to 6.0%. Governor also defended that rate action was not from any kind of pressure from "powers that be", and chose to back it up from building downside risk in FY16 growth target from 7.8% to 7.6%. If both are to be read together, rate pause would have been a better option having delivered 50 bps cut in Q1/2015. RBI also had the option to push overnight call money rate from 7.75% to 7.50% through removal of refinance restrictions at Repo counter; current restrictions do cause volatility between Repo-MSF corridor. Given the huge excess SLR in the banking system, higher refinance entitlement would have provided call money rate stability around Repo rate. Now, call money rate would stabilise at 7.25-8.25% (with most trades around 7.50%, down from 7.75%), which could have been achieved with higher entitlement on overnight at 1-2% of NDTL. Believe, a scarce ammunition of policy rate cut is wasted when more is not in pipeline!
Would this rate cut come in support of growth? No, when bottlenecks are not interest rate sensitive. Why? Liquidity in the system is in plenty when RBI in $ buy mode and Banks holding 6-8% of excess SLR portfolio. Cost of liquidity is low for good credit, while high risk and highly leveraged borrowers are feeling the heat, whom can't be helped by RBI. Growth outlook is trending down from economic policy sensitive sectors, while interest rate sensitive sectors are not doing bad. The corporate earnings pressure can't be attributed to high interest expenses, when capacity utilisation is sub-optimal and margin efficiency is poor. The investment and consumption pick-up (to drive efficiency) has to be lead by policy measures and public investments and RBI supportive monetary policy can only be an enabling catalyst. So, Government should put pressure through actions and not by words, if at all. All taken, it is pity that the RBI Governor is made to "reverse-walk the talk", delivering 25 bps rate cut after highlighting cues that do not support rate cut!
What next? Extended pause or risk of rate hike!
Now, the way ahead is clear building three possible options based on RBI's CPI outlook of 6%: 25 bps rate cut on trend-down to 5%, extended pause into 2015 on trend down to 5.5% and 25 bps hike if 6% scare turns out to be real. It is common sense that 25 bps cut in 2015 is near-zero possibility as cues driving downside risks are more. The obvious choice therefore is extended pause through rest of 2015 and prepare for rate move either-way in Q1/2016, by when FED would have raised rates by 50 bps. All taken, outlook for rest of 2015 is not positive to keep financial markets in bearish consolidation undertone.
Way ahead for financial markets
Will FPIs stay put to absorb short term pains, when timing of shift to long term gains is not clear?
Equity markets is already into bearish undertone; NIFTY at risk into lower end of 7950/8000-8350/8400 and Bank NIFTY at 17200/17350-18200/18350. Need to stay neutral on hold at 7950-8000 (and 17200-17350), not ruling out deeper reversal into 7500 (and 16000) before long term strategic investment appetite kick in.
10Y benchmark 7.72% 2025 will come under pressure from regular pipeline supply against low investor appetite. The base is already up from 7.62-7.65% to 7.70-7.72% with minimum downside target at 7.80-7.85%; if US 10Y yield moves up into higher end of 2.10-2.35% against India-US yield spread comfort zone at 5.50-5.65%, pain will be more.
Rupee will be under pressure from import lead - export lag play against risk of FPI exit and bullish consolidation in USD Index at 95/96.50-98.50/100 before bullish pick-up beyond 100. All taken, MARKET PULSE already shifted base from 61.65-62.15 to 62.95-63.45 with end June'15 $ stability at 64.00-64.50 and 12M $ hold at 68 for rally into 69-70. All taken, USD/INR spot focus trading range is set at 63.45/63.70-64.60/64.85, and thereafter into consolidation mode at 64-66.
Cash is the king till Q3/2015, awaiting fresh cues to trigger investments or for extended stay in cash!
Moses Harding
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