Signs of rough weather ahead for the Indian economy: RBI is expected to deliver 25 bps rate cut on 19th March mid-quarter policy review while staying cautious on the way forward, says Moses Harding, IndusInd Bank.
The economic data prints are mixed, complex and tightens the noose around the conflict between growth-inflation dynamics. There is great relief from sharp decline in headline WPI inflation print; January 2013 below 7% with expectation build-up of March 2013 print around 6.5%, much below RBI’s revised estimate of 7%. Core inflation is also sharply down into 4% highlighting the sub-optimal capacity usage of the economy (low investments and consumption) and the need to shift into dovish monetary policy, declining interest rate and surplus system liquidity. The good things end here! The retail CPI inflation print is up at 10.8% for January 2013 with strong uptrend from the impact of cut in subsidies, higher MSP for agriculture commodities and supply side constraints. RBI is also now vocal about the concerns of “Aam Aaadhmi” who take the pain without any resistance. Current Account deficit is up at $20 Billion for January 2013; concern is from strong uptrend since June 2012. There seems to be no credible solutions to this make-or-break issue. MARKET PULSE highlighted these two issues hurting the Indian economy hard and restraining RBI from shifting into growth supportive monetary stance. It is less said the better on fiscal deficit; market stake holders are in disbelief at numbers of 4.8-5.3% projected for FY13-FY14 by the Finance Ministry. If it is achieved through distress sale of public assets and by deferring productive expenditure, it will do more harm than good! The cues on GDP growth momentum is not encouraging, estimated at 5.0-5.5% for FY13. It would be a pleasant surprise if revenue targets are met this fiscal. There seems to be no serious efforts to lift the growth momentum through support to core sectors and policy reforms to spur investments and consumption. There is lot to be done to improve the productivity and efficiency of the India Inc Balance sheet with the need to achieve acceleration in growth momentum for higher revenues, moderation in consumption expenditure and improvement in return on assets of public investments. The system is in “borrow to consume” mode for long with no internal cash generation for shift into “invest for productivity”; ‘powers that be’ need to work for this shift. What the system awaits is the start of “work-in-process” for this shift and will look for cues in the Budget FY14. In the meanwhile, RBI is expected to deliver 25 bps rate cut on 19th March mid-quarter policy review while staying cautious on the way forward. What it really matters for RBI is the liquidity squeeze in the system; widening CAD has not only increased external debt (and high dependence on short term/hot money equity flows) but has also siphoned out domestic liquidity which dilutes price-transmission of rate cut actions. It’s indeed complex and provides little clarity on the wary forward, building uncertainty and bearish undertone.
Exchange rate market:
USD/INR has traded end-to-end of 52.85-54.10 since end January 2013; down from 53.95 to 52.88 and back into 54.23 before close at 54.22. MARKET PULSE expected a formation of strong short term base at 52.85-53.00 with bounce limited to 53.95-54.20. The strategy was to cover up to 3M imports at 52.85-53.00 (at forward value below 54.00) and to cover 3M exports at 53.95-54.10 (at forward value above 55.00). It was also considered good to part-cover 12M exports at forward value above 57.50. Rupee stayed steady to mildly bullish despite higher CAD taking positive cues from sharp decline in headline WPI inflation print and robust FII flows. The trigger for extended weakness beyond 53.95 into 54.20 is largely attributed to sharp reversal in EUR/USD from 1.37 to 1.33; positive take-away is that of diluted impact of Euro traction on rupee. What next? The domestic cues continue to weigh heavy on rupee; macroeconomic fundamentals remain weak and fragile. The comfort for rupee is from strong FII flows and high FX premium maintaining forward market in supply driven mode. Importers derive great comfort from Government’s measures to address issues relating to growth and twin-deficits and RBI’s shift into growth supportive monetary stance. There is no sign of set up of “fear factor” for importers to panic at this stage. On the other hand, there will be set up of “greed factor” for exporters to rush to hedge medium/long term receivables and borrowers to shift long term rupee liabilities into dollars; current 12M forward rate around 57.75 will attract given the 2013 trading range of USD/INR at 51/53-56/58. Since entry into 2013, Rupee has been volatile; opened bullish at 54.90 (against 2012 close of 54.99) and rallied sharply from 55.38 (low on 8th January) to 52.88 (hi on 6th February) and now nervous at 54.20. USD/INR has now shifted into higher trading range at 53.50-54.50 with extension limited to 53-55. For the week, let us watch consolidation at 53.75/53.90-54.40/54.55; bias thereafter is for rupee recovery into 53.10-53.35 on positive cues from Budget FY14 and rate action from RBI. Rupee is also expected to get support from bullish momentum in Euro from 1.3250-1.3300 into 1.3550-1.3700 and signs of reversal in Commodity prices. The strategy is to build “short dollar book” in two lots at 54.40-54.55 and 54.75-54.90 (with stop above 55.00) while importers to stay aside for 53.75-53.90 and 53.35-53.50.
EUR/USD traded end-to-end of intra-week support at 1.3300-1.3325 and resistance at 1.3500-1.3525; initial rally from 1.3324 lost steam at 1.3520 for sharp reversal into 1.3305 before close of week at 1.3360. What next? The ability to close the week above 1.3350 provides comfort for recovery into 1.3450-1.3525 and thereafter into 1.3700. It would be a period of consolidation in the near term at 1.30/1.32-1.35/1.37. For the week, let us watch consolidation at 1.3275/1.3300-1.3500/1.3525; extension into outer corridor is expected to hold. The strategy is to trade end-to-end with tight stop/reverse on break thereof for extended move into either 1.3075-1.3150 or 1.3650-1.3725.
USD/JPY traded back-and-forth within set support zone of 91.95-92.25 and resistance zone of 94.25-94.75; initial rally from 92.34 failed at 94.42 for sharp reversal into 92.34 before close of week at 93.48. What next? The sharp rally (and depreciation of Yen) from 77.11 (16/9/12) to 94.42 (11/2/13) by 22% in less than 5 months has caught the attention of other Central Banks but there is no risk of sharp reversal while upside gains may be shallow from now on; May 2010 high of 94.98 is still in the radar while 92.00 stays firm. For the week, let us watch consolidation at 92.00/92.25-94.75/95.00. The strategy is to trade end-to-end with tight stop/reverse on break thereof for extended move into either 90.00-90.25 or 96.75-97.00.
Interest rate market:
10Y Bond traded end-to-end of set intra-week range of 7.79/7.81-7.88/7.90%; initial rally into 7.89% found solid support for swift reversal into 7.80% before close of week at 7.83%. The rally was triggered by OMO and sharp decline in headline WPI inflation print for January 2013 building up hope for rate cut on 19th March mid-quarter policy review. It was followed by strong selling interest around 7.80% with Banks unwinding huge excess SLR investments. What next? As explained, it would be period of consolidation as bullish momentum from sharp downturn in WPI inflation is diluted by widening CAD and elevated retail CPI inflation. While RBI is expected to deliver 25 bps rate cut on 19th March, it may be an extended pause thereafter. Given this expectation, MARKET PULSE considers it prudent to unwind longer tenor Bonds (10Y and beyond) on extended gains below 7.80% and to reduce the duration of the investment portfolio by shifting into shorter tenor bonds (5Y and below). It is prudent to take money off the table while retaining the portfolio yield. Moreover, upside gains is expected to be higher in the shorter tenor than in medium/long tenor as yield curve prepares for steepness to build tenor premium. For the week, let us continue to watch consolidation at 7.79/7.81-7.86/7.88 and move into outer corridor expected to hold. The strategy for traders is to trade end-to-end with tight stop on break thereof. Strategic investors who have unwound at/below 7.80% can stay prepared to reinstate in two lots at 7.85-7.87% and 7.90-7.93% given the short/medium term trading range at 7.65/7.70-7.90/7.95%; beware of huge supplies at 7.65/7.70-7.80% where it is not prudent to hold strategic investments.
OIS rates traded end-to-end of set intra-week range of 7.58-7.65% (1Y) and 7.23-7.30% (5Y) before close at 7.60% and 7.25% respectively. What next? Given the mixed cues, it would be period of consolidation but the tone would remain bid tracking hardening money market rates/yields. The system also may need to stay with operating policy rate at 7.5% till second half of 2013, thus triggering short term consolidation play at 7.50-7.65% in 1Y and 7.20-7.30% in 5Y. For the week, let us watch consolidation at 7.55/7.57-7.63/7.65% (1Y) and 7.20/7.22-7.28/7.30 (5Y) and move into outer corridor is expected to hold. It is traders market and it would be good risk-reward to trade end-to-end with tight stop on break thereof. Strategic players can stay away for break-out for action but strong momentum is not seen for break-out either way.
FX premium traded end-to-end of 7.50-7.75% (3M) and 6.50-6.75% (12M) before close at 7.6% and 6.6% respectively. The strong interest rate play which was building momentum for break-up into 8% and 7% met with strong headwind from exchange rate play driving USD/INR from below 53 to above 54. The undertone continues to remain bullish despite 25 bps rate cut expectation on 19th March with risk of reversal in USD/INR from above 54.20 into below 53.60 in the near term. For the week, let us watch 7.35/7.50-7.75% (3M) and 6.40/6.50-6.75% (12M); risk of break-up into 8% and 7% on shift into last month of FY13 remains valid. The strategy is to stay paid at 7.35-7.50% (3M) and 6.40-6.50% (12M) for near term objective at 7.75-8.0% and 6.75-7.0% respectively.
NIFTY posted intra-week rally from 5879 to 5969 but only to reverse sharply for extended weakness into 5853 before close of week at 5887. MARKET PULSE strategy was to sell at 5935-5960 (with stop above 5970) while expected near term reversal from above 6100 into 5825-5850 has been met. What next? The undertone is not bullish given the lack of participation from domestic investors who continue to prefer Fixed Income assets for coupon and price appreciation; makes sense. There is also no cheer from macroeconomic fundamentals with severe pressure on growth and twin deficits. While the cues are uncertain and mixed in the near term, there is confidence that momentum will be built to trigger short/medium term rally in second half of 2013. Given these expectations and lack of confidence on corporate performance in next reporting quarters, NIFTY is expected to stay in consolidation mode with mild bearish undertone pulling 5750-5765 into the radar while 5960-5985 stays firm. For the week, let us watch consolidation at 5800/5850-5950/6000; move into outer corridor will attract. The strategy is to sell in two lots at 5920-5935 and 5960-5985 (with stop above 6000) for 5820-5845. Strategic investors who unwound investment at/above 6100 can stay prepared to re-build the book with first lot at 5825-5840.
Gold has met the set reversal objective at 1590-1605 (low at 1598) from set sell zone of 1680-1695 (high at 1685) before close of week at 1609. The undertone is bearish pulling 1530 into the radar; first signal will be on break of 1585 while 1620-1635 stays firm. But there are no strong signals for extended weakness below 1530 with risk of relief rally (on shorts squeeze) into 1660-1685. For the week, let us watch 1565/1580-1620/1635 with bias into lower end. The strategy is to reinstate “shorts” at 1620-1635 (with stop above 1645) for 1565 ahead of 1530.
NYMEX Crude traded back-and-forth within set weekly range of 95.00-97.75/98.50; initial rally from 94.97 held at 98.11 and back into 95.21 before close at 96.05. There are signs of loss of bullish momentum and prepare for sharp unwind of recent rally from 84.05 to 98.24; first signal will be break of immediate support at 94.85-95.00 with targets at 92.85 and 91.15. For the week, let us watch 93.00-97.50/98.25 with bias into lower end. The strategy is to stay “short” at 97.50-98.25 (with stop above 98.50) for 93.00 ahead of 91.00-91.25.
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