Market Views – 28 AUGUST 2009
Liquidity & Term Money market:
Call rate traded steady within 3.10-3.30% with overnight MIBOR unchanged at
3.29% and flow of funds into R/R counter up at Rs.1.47 trillion against previous
Rs.1.18 trillion while CBLO rate crashed to less than 1% on reduced demand for
funds ahead of reporting Friday (28/8). Despite the liquidity over-hang, term
money rates stayed mixed with 1M MIBOR up at 3.89% against previous close of
3.87%; 3M MIBOR down at 4.52% against previous close of 4.57%; 3M CD rate
up at 3.95% against previous close of 3.90% and 12M CD rate down unchanged
at 5.75%.
The excess liquidity in the system is back at close to peak level of Rs.1.5 trillion
ahead of reporting Friday and would continue to stay above Rs.1 trillion till
October Monetary Policy despite week-on-week auction outflows. The lukewarm
response in OMO (at current higher yield) will not add to liquidity. The risk is of
RBI squeezing liquidity and effecting hike in policy rates in the event of pressure
in inflation, the concern of which has already been raised by the FM. If it has to
be nipped in the bud, some proactive measures from RBI are not ruled out in the
October Monetary Policy. There is build-up of expectation for hike in SLR
(and/or hike in policy rates) which should limit strength in term money rates
despite liquidity over-hang. For now, let us continue to stay tuned to stability in
call money rate at 3.27-3.30% and stability in term money rates with slight
upward bias.
Government Bonds & OIS:
Bond yields/OIS rates unwound most of recent gains (unable to figure out the
cause of previous days’ rally) and rejection of more than 50% of OMO amount
added momentum to the fall with 1Y closing unchanged at 4.30%; 5Y benchmark
6.07% 2014 yield up at 7.05% against previous close of 6.86%; 10Y benchmark
6.90% 2019 yield up at 7.28% against previous close of 7.13%; 1Y OIS rate up at
4.44% against previous 4.40% and 5Y OIS rate up at 6.44% against previous
6.35%. The momentum to the fall may also be due to unwinding of “longs” by
foreign banks who were the net buyers on the previous rally.
Now, the risk would be of extension in weakness ahead of today’s auctions and
test of recent lows (of 5Y benchmark bond at 7.10% and 10Y benchmark bond at
7.38%) is not ruled out. The cut-off yield in the auction will be critical to prevent
test/break of recent lows ahead of 7.25% (5Y) and 7.50% (10Y). While liquidity
is not a concern in the near/short term, the demand-supply mismatch caused by
week-on-week auction would keep bond yields under pressure. Further down, the
outlook continues to remain bearish on the fear of inflation pressures triggering
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tight monetary policy. The only positive factor is the possible hike in SLR
bridging the demand-supply mismatch to limit weakness to provide in stability in
bond yields in the medium/longer tenors while pushing the shorter end yield/rate
curve up . Hence, let us stay tuned to near/short term range of 4.25-4.50% (1Y Tbill); 6.75-7.25% (6.07% 2014); 7.0-7.5% (6.90% 2019); 4.30-4.55% (1Y OIS)
and 6.35-6.60% (5Y OIS). The bias would be for move towards the upper end (to
invite RBI attention and to guide reversal if deemed fit) and hike in SLR to
provide test of lower end but the break of which should not sustain. So, it would
be good risk-reward to trade both ends of the said range. For today, let us stay
tuned to 4.25-4.35% (1Y T-bill); 7.0-7.15% (6.07% 2014); 7.20-7.35% (6.90%
2019); 4.40-4.50% (1Y OIS) and 6.40-6.55% (5Y OIS). The initial weakness
into upper end should be resisted by investors chasing higher yield but bearish
cut-off yield in auction would trigger test/break of upper end while RBI rejection
of bids at higher yield will result in unwinding of most of yesterday’s losses but
not expected to overshoot beyond 6.85% (5Y) and 7.10% (10Y).
USD/INR SPOT:
Rupee traded within 48.85-49.05 tracking the two-way move in stock market
(with SENSEX trading within 15685-15853) and steady EUR/USD (within
1.4240-1.4270) to post intra-day low of 49.05 and high of 48.84 and closed the
day unchanged at 48.92. There was usual month-end demand from large PSU
importers to keep rupee in bid mode.
The first attempt for shift into near term range of 49.00-49.50 failed on good
exporter sales to cover 1-3M receivables and now rupee is back into near term
consolidation within 48.50-49.00. In the meanwhile, EUR/USD held its strong
support at 1.4230 well for a sharp bounce into strong resistance zone of 1.43801.4400. Stock market too is expected to be in consolidation mode with upward
bias for move into 15850-16000 to have another knock above 16000. Given this
outlook, rupee would recover its recent weakness for move into 48.50-48.65
which is expected to hold till clarity emerges on the immediate direction in
SENSEX and EUR/USD. The shift of near term range from 48.50-49.00 into
48.00-48.50 would be only on EUR/USD sustaining its strength above 1.4350 in
preparation of test/break of 1.4450. SENSEX move above the strong 1600016100 resistance zone will accelerate gains. We need to have close watch on this
but the bias would be for EUR/USD faltering in the 1.4350-1.4450 zone for pullback to 1.4200-1.4250 and SENSEX limiting its gains at 16000-16100 for pull
back to 15350-15500. These expectations will continue to keep alive the set short
term range-play within 48.50-49.50. For today, let us stay tuned to 48.65-48.85
and watch EUR/USD at 1.4300-1.4450 and SENSEX at 15650-16000. The
bias is for move into 48.50-48.65 which is expected not to sustain (on
EUR/USD loosing its steam at 1.4400-1.4450 and gains in SENSEX limited to
16000) for reversal back into 48.85-49.00. Any overshoot into 48.35-48.50
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should be absorbed by importers to hedge 1-3M payables and exporters to unwind
part of earlier sales and to stay light for re-entry at higher levels.
USD/INR Forward Premium:
Premium remained soft tracking higher USD/INR (attracting exporters’ supplies
in the near end tenor of 1-3M); liquidity over-hang with flow of Rs.1.5 trillion
into RBI’s R/R counter and easy call money rate to close easy at 2.40% (3M);
2.45% (6M); 2.35% (12M) and 2.30% (3M/12M).
Now, premium would move into consolidation mode with upward bias on demand
for forward dollars (on lower USD/INR into 48.35-48.65) but easy term money
rates would limit weakness to guide stability. The strategy to receive 3M and pay
12M has not caused much of damage as gains in 3M have been more significant
to guide stability in the 3M/12M tenor. Let us continue to stay with running “paid
book” in the 3M/12M period, as the gains would be swift in this tenor when
signals of interest rate reversal would surface. There is already caution on
inflationary pressures from the FM to put RBI on guard, hence measures to suck
out liquidity through SLR hike (without CRR cut) may not be ruled out. Hence,
dips from now on would be shallow but immediate sharp reversal is not on cards
and would prefer a two-way range play in the near term at 2.25-2.75% (3M);
2.25-2.65% (6M) and 2.25-2.50% (12M) with both ends likely to stay protected
till October 2009. For today, let us stay tuned to 2.30-2.55% (3M); 2.40-2.55%
(6M) and 2.30-2.40% (12M) and watch 27.75-30.75 (S/November); 57.25-61.0
(S/February) and 112-117 (S/August) with bias towards test/break of higher
end.
SENSEX & NIFTY:
It was yet another tight range trading within 15685-15853 (4645-4707) to close
the day at 15781/4688 with marginal gain of 0.10% against previous close of
15769/4680. The consolidation phase continues to be protected at immediate
support of 15650/4650 and resistance of 15850/4710. It is great comfort for
investors that Indian bourse continues to close positive despite Asian bourses
closing in red.
The performance in the week has been good with strong bounce from intra-week
low of 15362/4536 (against previous week close of 15240/4528) but the lack of
follow-through momentum to pierce through strong resistance zone of 1585016000 (4710-4750) is a concern. It is also to be noted that there is no strong case
for extension of gains beyond 16000-16100 (4750-4785) given the steady (to
weak) global cues and lot of uncertainties ahead in the domestic front. The present
consolidation is mainly driven by excess domestic liquidity and not on
fundamental strength and/or bullish outlook for the future. Hence, we continue to
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look for continuation of consolidation mode at 15500-16000 (4600-4750) in the
near term and overshoot to stay limited to 15350-16100 (4560-4785). For today,
let us watch two-way sideways trading mode at 15650-15850 (4650-4710) and
overshoot into 15850-16000 (4710-4750) not to sustain. However, unwinding
of investments ahead of week end would generate more of supplies (and less
demand for fresh investments) for a steady weekly close within 15650-15850
(4650-4710). A weekly close of below 15650/4650 will be negative for the next
week and close above 15850/4710 will lead to extension in gains towards
16350/16500 (4860-4900).
J. Moses Harding
Head – Global Markets Group
IndusInd Bank, Mumbai.
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