India retain shift from hope to confidence while the rich economies boxed between optimism and despair
MARKET PULSE highlighted (in its 2016 outlook update) the positive bias on India Financial markets retaining hope from domestic cues supported by minor tailwind support from external dynamics. Uday Kotak interview endorse this statement with precision clarity. I enjoyed reading Uday's view points more than once. The domestic optimism revolve around step-up pace in domestic investment and higher consumption, which highlights sustainable domestic capacity expansion. The catalyst play will be from Government's policy executions that would add to foreign investment flows and expand India economic capacity to build for external consumption. Uday has rightly pointed out the growth pick up in UPA 1 regime (2004-2009) from arbitrage themes providing higher margin by acquiring cheap (at deep discount) and selling at huge premium. The arbitrage play also extended to liquidity (driven by ultra-dovish monetary stance of developed economies) and interest rate (elevated domestic interest rate regime) against relatively stable Rupee exchange rate. This arbitrage play (for higher margin) may not be available now on better policy & regulatory transparency and financial market efficiency. Uday also commented on three basic themes around productivity, efficiency and cost optimisation, by being frugal. When majority of the GDP contribution is controlled by the Government and PSU entities, the change has to be led by the Government. The bottom-line for long term India prosperity is in the way the PSU entities gear up for upgrade of productivity and efficiency being frugal and cost-revenue efficient. It is also critical for private investors to shift the investment theme from quick-money and one-off arbitrage play to consistent and sustainable long term revenue play. This combination of Government and private mind-shift supplemented by foreign investments will set up strong base for India prosperity in 2016, making it a glorious run for the next 10-25 years! As India completes 25 years of economic liberalisation (1991 to 2015), our generation (now in the age group of 50-65 years) has contributed lots to domestic consumption and investment. The next 25 years is the opportunity for the next generation (in the age group of 25-40 years) to lift it up to much higher levels against lower base and higher compounding impact. India outlook may look vulnerable in the short term, but the long term prosperity theme is very much in tact!
The worry however is from the play in external dynamics. It is not sure at this stage either for shift to optimism (led by the US economy) or into despair (pulled down by the China and other emerging markets and the Euro zone). While it is make-or-break game for the global markets, the impact from FII appetite (either complete exit or flood like entry) will lead to extreme short term volatility eitherway. The positive take-away is that the India market impact will be shallow from FII exit and extreme on accelarated inflows, which retains India status as a preferred destination among BRICS and other emerging markets. Uday's point of view that India should go out alone (and not in the company of BRICS) is a good point for discussion by the powers that be.
Elevated interest rates against easing inflation and fiscal prudence is comfort
The blessing in disguise for India is the elevated interest rates despite sharp decline in wholesale and retail inflation. India stands out in this dynamics against the peers who are mostly in low inflation and low interest rate play. The outlook on India is CPI stability at 4.5-5.5% and fiscal prudence into lower end of 3.5-4.0% to drive gradual decline in Bond yields through 2016-2017 for base set up for inflation around 4% and operating policy rate around 6%, thus setting up 75 bps rate cut between mid 2016 to end 2017. This outlook will retain FII appetite on Gilts and Corporate bonds against relatively stable Rupee exchange rate with annual depreciation rate at 3-5%. All combined, investor appetite will stay skewed towards debt/fixed income in H1/2016 before shift to risk-on equity assets if domestic cues turn favour and external dynamics stay neutral.
India Financial markets short term outlook is between bearish to neutral consolidation
MARKET PULSE zoom-in focus for NIFTY is set at 7500/7650-8000/8150 retaining breakout bias into 8000/8150-8500/8650. So is Bank Nifty at 16350/16500-17000/17150 before shift into 17000/17150-18000/18150. The 2-step immediate term resistance is set at 7965-8000 (17000-17150) and 8100-8135 (17350-17500) against 2-step strategic bids above 7650-7685 and 7515-7550. At this stage, combination of disappointment from domestic cues and despair from external dynamics could trigger downside risks for Nifty shift of play into 6850/7000-7500, hence hold stop at 7485 while retaining 2016 Nifty big-picture outlook at 7500-8500/8650.
India 10Y bond play need to be passive absorbing weakness into 7.78-7.93% through H1/2016 against duration-cut mode at 7.65-7.70%. While retaining 2016 range outlook at 7.45/7.50-7.90/7.95%, short term pull will be towards higher end before gradual decline into lower end. The risk factors are from stubborn CPI at 5.5-6.0% and accelarated shift of FED policy rate from 0.25-0.50% to 1.0-1.25% which could delay the 7.45-7.50% target to 2017 while retaining sideways play at higher end of 7.70-7.95%.
MARKET PULSE retain zoom-in focus on USD/INR at 66/66.20-67.20/67.35 in the short term. The hedge strategy is to hedge 1M imports around 66.50, cover 1M exports around 67.50 in traction with 12M $ at 70.25/70.50-71.25/71.50. The medium term outlook is retained for shift of play into 67-70 in H1/FY17.
All combined, there is nothing to panic and hats off to Uday Kotak for the confidence boosters to stake holders and critical pitch pointers to the Government and regulators.
Best wishes and Good luck!
Moses Harding
harding.moses@gmail.com
9674734145
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