India financial markets got weak across asset classes – equities, fixed income and Rupee. But, there was RBI to support Debt capital market, while concern emerged on the equities when RBI not seen comfortable on the overheated equity valuation, not aligned to contraction in the real economy and significant earning squeeze on most business enterprises, and more importantly when pushed by external players – when retail investors join FPI play, regulator’s concern & caution is relevant and appropriate. The outlook was to expect turnaround in first fortnight of September on run upto close of Q2/FY21. Blessing in disguise is that India equities reversal is not mirror impact of collapse in US equities from 3rd September high, but dilution of external tailwinds support against worsening domestic dynamics is cause to worry. Given the H1/FY21 GDP contraction is expected to be 15-20% from FY20, need strong H2 performance to achieve soft landing for FY21 GDP, contraction to stay in single-digit, while FY21 fiscal deficit overshoot target is anybody’s guess but worst is that system unable to fix on it for workaround. Need to get clarity on deficit monetisation, disinvestment and any other methods that would be used to avoid printing double-digit number on fiscal deficit as % of (lower) GDP. Another unknown is the extent of NPA escalation from C-19 impact, but would need to wait beyond September to get clarity on (a) size of restructured portfolio (b) migration of other loans to SMA 0-2 for NPA effect in Q4/FY21 (c) ability of borrowers to repay moratorium amount (principal + interest for period March-August) on or before 31st March 2021. So, all is not well for the banking sector and worse from (a) fear of hardening interest rates from risk of shift of operating policy rate to Repo rate (b) headline inflation trend ahead of October policy review, providing bandwidth to remain accommodative, avoiding shift of stance to neutral which will be negative, bringing possibility of rate hike into the radar. All combined, What Next for this week and through end of Q2/FY21 is uncertain, and when way ahead is not bright & clear, good to stay light and not overexposed to risk.
NIFTY previous week outlook was restricted at 11350-11850 (allowing maximum upside of 150 points over previous high 11686); got script perfect moves at 11794-11336-11585-11303 before close at 11333, lower end of intra-week revision at 11285/11350-11500/11565. What Next? While close below 11350-11565 is negative, need breakdown at 11200-11350 for deeper into 10850-11000 for completion of 10882-11792 rally. For the week, let us set focus at 11000/11085-11500/11585 with pull bias into lower end, and not ruling out deeper correction into 10850-11000, given the urge to dilute risk ahead of hardening short term interest rates.
Bank Nifty outlook was not to chase gains beyond 24500-24650 for reversal below 23350-23500, advising take-profit on Big7 holdings; got the reversal from 25225 to 22876 before close at 23011. What Next? For the week, retain pull bias towards 21000 for complete unwind of 21033-25225 recovery with risk-off supply below 24000. I am yet to find one strong cue that would push for buy for hold for crossover to FY21, and the worry is from break-neck volatility and unsustainable overshoot.
10Y bond volatility at 5.75/5.80-6.20/6.25% came to an end with nervous consolidation at 5.85-5.95%, thanks to RBI’s out of the box (wouldn’t call it innovative or big-bang) measures, pushing banks to use the excess liquidity in their balance sheet to buy Gilts (issued on or after 1st September, both in primary & secondary markets), avoid lending in R/R counter with indirect message to use liquidity before dynamics shift to operation of Repo counter – the idea is to buy when 10Y yield at 5.85-6% (available for refinance at 4%) with agenda to resist 10Y yield spike beyond 6.25-6.35%. Makes sense and worked well shifting 10Y yield play from 6.20-6.35% to 5.85-6%. Can RBI achieve 10Y yield stability at 5.85-6% when odds are heavily against? Can these one-sided measures bring in permanent relief or at least be temporary resolutions? There’s no sign of strategy to fund widening fiscal deficit in the absence of lack of clarity on size of the hole? Having squeezed India-US 10Y yield spread from 5.50-5.65% to 5.20-5.35%, FPI may not consider shift from equities to debt option to stay in the India play? While these uncertainties remain, investors will opt to portfolio-light or duration-cut when 10Y at lower end of 5.85-6% while traders play back & forth taking near term comfort from RBI. There’s no clarity to buy for hold at 5.925-6% when short-medium term risk into 6.20-6.35% is in the radar.
It was perfect landing of USD/INR from 74.85-75 to 72.65-72.80 ending down-hill chase (with trail stop at 75.15) for 72.65-72.85 (12M $ at 75.65-76, down from 79.65-80.0 + ₹1 carry premium). While extension below 72.65-72.80 to 71.50 was kept in the radar, combination of USD Index recovery at 91.50-93.50 and risk-off set up in equities turned the tide into 73.15-73.50 before close around 73.15, trail stop loss for those in chase into 71.50-72.65. What Next? It’s possible that USD/INR reversal from 77 is done at 72.75 for pull back into 73.50-74.50 with best case at 71.50-72.50 if FPIs continue to be in $ supply mode. So, good to be in back & forth mode 72.50/72.85-73.50/73.85 and need to keep attention on USD Index at 91.50-93.50/94.50 and FPIs net flows in FX market, while RBI expected to be hands-off while at 71.50-75
EUR/INR reversal from 89.15-90.0 to 86.50 is script perfect – 89.46 to 86.30 before close at 86.76. Given EUR/USD outlook at 1.1650/1.1725-1.1925/1.20 with pull bias into lower end, need to consider EUR/INR focus shift from 86.50-90 to 85-88.50 for consolidation at 85-86.50, which is also seen as short term base. For the week, good for back & forth at 85.75-87.75 with either way overshoot into 85-85.75 or 87.75-88.50 not expected to sustain.
All combined, it’s not the time to stay risk-heavy on India assets given major event risk in end of September (extent of contraction in Q2/FY21 top line growth and PAT) and the tone of MPC in October policy review. When way forward is dark, stay still and when not clear with poor visibility, stay aside!
Have a great week ahead…stay prudent & safe!
Moses Harding
Excellently articulated.. Shows the knowledge, experience and research. Enlightened to read it
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