Call money rate nicely eased into 6.59% and draw down from RBI sharply lower at
Rs.45K Crores. Term money rates too marginally down at the shorter end of the rate
curve (up to 3M tenor) while longer end (at 6-12M) tenor stayed steady. Bond market
was in consolidation mode trading end-to-end of set ranges of 8.12-8.17 (5-10Y) and
8.15-8.22 (12Y). The initial rally into the lower end guided by easing liquidity could not
sustain for swift reversal into the higher end tracking bad inflation data for close at 8.16-
8.17% (5-10Y) and 8.21% (12Y).
The swift turnaround in the liquidity scenario pushing system shortfall to less than 1%
of NDTL and call money rate moving close to Repo rate of 6.5% despite being at the start
of the reporting fortnight (29/1 – 11/2) are positive to money (and bond) markets. It is
now possible that call money rate would move into LAF corridor (of 5.5-6.5%) by end of
current reporting fortnight to push shorter end of rate/yield curve sharply down (at 8.5-
9.5% across 3-12M tenor) and 364D T-bill yield down to 7.35-7.50%. The only concern
is the inflation worry with food inflation up at 17% despite supply side and other
administrative measures taken by the Government. This will trigger rate hike
expectations during midterm policy review (in mid March) but comfortable liquidity
should not cause any serious concern on money (and bond) market. Let us continue to
stay tuned to set near term ranges of 7.50-7.65% (1Y); 8.10-8.20% (5-10Y) and
8.10-8.25% (12Y) with immediate term bias for gradual rally into the lower end.
There are lot of positive triggers for this expectation – easy liquidity; soft money market
rates; good investor appetite (and participation) in RBI's bond auctions; move into
round of FY11 borrowing schedule with no more supplies from RBI till April etc. For
now, let us watch overnight MIBOR at 6.55-6.60% and draw down from RBI down
to below Rs.25K Crores on shift into second week of reporting fortnight. Bond
market would stay in consolidation mode within 8.10-8.17% (7.99% 2017 and
7.80% 2020); 8.12-8.20% (8.13% 2022) and 8.14-8.22% (8.08% 2022). The trade
recommendation is to buy 8.08% 2022 bond in two lots at 8.20-8.21% and 8.23-8.24%
(with stop at 8.26%) for 8.15%. Let us sell 8.13% 2022 at 8.17-8.15% (with stop at
8.14%) for getting it back in the auction at 8.20% (expected cut-off yield) and to buy
there (at 8.19-8.20%) keeping room for adding at 8.22-8.24% (with stop at 8.26%) for
post auction rally into 8.15%. It is also time to build up the 364D T-bill book at
current yield of 7.55-7.60% for good funding arbitrage (of 75-100 bps) and for
near term rally into immediate objective at 7.35%.
Overnight Index Swaps (OIS):
OIS rates traded end-to-end of set ranges of 7.35-7.45% (1Y) and 7.95-8.05% (5Y) with
high of 7.46% and low of 7.36% (in 1Y) and high of 8.03% and low of 7.97% (in 5Y)
before close at 7.42% and 8.03% respectively.
Let us continue to stay tuned to now familiar range of 7.35-7.45% (1Y) and 7.95-8.05%
(5Y) with immediate bias for move into the lower end not ruling out test/break thereof.
The steady (to soft) bond yields and downward bias in the term money rate curve driven
by call money rate trading close to operative policy rate (now Repo rate at 6.5%) will be
the triggers for this move. It is also possible that test/break of lower end will be on call
money rate moving into LAF corridor (now at 5.5-6.5%) ahead of time. The expectation
is also that of RBI delivering next round of 0.25% hike in policy rates by mid March 2011
if inflation continue to stay at elevated levels by then. Given the RBI' stance of limited
impact on food inflation through tough monetary policy measures, adequate system
liquidity will be maintained to keep call money rate steady within the then LAF corridor
of 5.75-6.75%. Even in the worst case scenario of RBI delivering 0.5% hike in R/R rate
for LAF corridor at 6.0-6.75%, call money rate will stay steady at 6.25-6.5%. So, the
directional bias in OIS rates is for limited weakness from now on for gradual move into
near term objective at 7.25% (1Y) and 7.85% (5Y). For now, let us continue to watch
7.35-7.45% (1Y) and 7.95-8.05% (5Y) with immediate bias for move into the lower
end. The trade recommendation therefore is to receive 1Y in two lots at 7.42-7.44% and
7.46-7.48% (with stop at 7.51%) and 5Y in two lots at 8.03-8.05% and 8.07-8.09% (with
stop at 8.11%) for test/break of 7.35% (1Y) and 7.95% (5Y) for profit at 7.30% and
7.90% respectively.
USD/INR SPOT:
From where we left, rupee traded tight range of 45.54-45.69 before close at 45.62; thus
down to the lower end of set near term range of 45.50-46.00. The spot move into the
dollar buy set up at 45.50-45.60 gave good opportunity for importers to hedge 1-2M
payables with March 2011 dollar down into the buy zone of 45.95-46.05 (punched a low
of 45.98 before close at 46.05). The trigger for rupee gains was from recovery in SENSEX
from 18000 to 18500 while EUR/USD was steady within 1.3750-1.3850.
Now, sharp reversal in EUR/USD from 1.3850 to below 1.3650 will push rupee to the
other end of the 45.50-46.00 range. The rationale for giving dollar buy call on spot rupee
move into 45.50-45.60 to hedge short term payables at forward value below 46.00-46.10
was based on high probability of EUR/USD losing steam to take out strong resistance at
1.3850 to trigger rupee weakness back into 46.00. In the meanwhile stock market will
stay in consolidation mode within 17850-18850 (5350-5650) in the near term to
prevent excessive moves beyond 45.50-46.00. For now, rupee is back into 45.60-
45.85 range with immediate bias for weakness into 45.85 tracking EUR/USD
consolidation within 1.35-1.37 and SENSEX within 18150-18650. Given the risk of
extended weakness in EUR/USD below 1.35 and SENSEX into 17850, rupee will be
under pressure for extended weakness into 45.85-46.00. The trade recommendation
is to buy dollars in two lots at 45.70-45.67 and 45.62-45.59 (with stop at 45.54) and to
sell in two lots at 45.85-45.88 and 45.93-45.96 (with stop at 46.01). Let us also watch
March 2011 dollars at 46.10-46.35 and January 2012 dollars at 48.30-48.60 with
test/break either way to attract. Exporters to await 12M forward dollar move into
48.70-48.85 considered as good hedge given the near zero possibility of spot rupee
weakness beyond 47.75 by then. Importers who bought March 2011 dollars at 45.95-
46.00 can unwind at 46.35-46.45 for pull back into 46.00-46.10.
USD/INR Premium:
The initial weakness in premium stopped dot at the set resistance at 7.10% (3M) and
6.10% (12M) for close at 6.90% and 5.95% respectively. In the process, 3X12M
(Apr/Jan) entered into the receive zone of 202-205 before close at 198.
Let us continue to stay tuned to the set near term ranges of 6.75-7.0% (3M) and 5.75-
6.0% (12M) with test/break either-way to attract. Now, both interest rate and exchange
rate play will guide premium into the lower end of the range. The ease in call money rate
into 6.55-6.65% and lower draw down from RBI at below Rs.50K Crores will shift the
interest play into neutral mode while higher USD/INR into 45.85-46.00 will exert strong
downward pressure on the premium. For today, let us watch 3M at 6.75-6.90%
(S/Apr at 68-69.5) and 12M at 5.85-6.0% (S/Jan at 262-269) with immediate bias
for moving into the lower end not ruling out test/break thereof. The trade
recommendation is to receive 12M at 5.95-6.05% (S/Jan at 267-271) with stop at 6.10%
(274) for immediate objective at 5.85-5.75% (262.5-258). Let us hold on to Apr-June
received book and add at 198-201 for next target at 192-190.
Stock Market:
Stock market has now traded end-to-end of set near term range of 17850-18500 (5350-
5550) for decent rally from the recent low of 17982/5402 to high of 18466/5532 before
close at 18449/5432.
The domestic cues has now shifted from bearish to steady mode on significant ease in
liquidity while the inflation fears continue to stay valid. The global cues however stay
uncertain (and mixed) despite the stance of western economies to delay reversal in rate
hike cycle. The delay in rate reversal cycle and good off-shore liquidity should improve
off-shore investment appetite in the Indian stock market bringing the hot money play
into focus. Let us continue to look for consolidation mode in the immediate term till we
get more clarity on the immediate direction. Till then, weakness into 17850-18000
(5350-5400) is expected to hold while gains into 18650-18800 (5600-5650) will resist.
For today, let us watch sideways trading mode within 18300-18650 (5480-5585)
with overshoot limited to 18200-18750 (5450-5600). The trade recommendation for
fleet footed traders is to trade end-to-end moves by buying in two lots at 18350-18300
(5495-5480) and 18250-18200 (5465-5450) with stop below 18150/5435 and to sell in
two lots at 18600-18650 (5570-5585) and 18700-18750 (5600-5615) with stop above
18800/5630.
Moses Harding
Executive Vice President
Head – Global Markets Group
IndusInd Bank, Mumbai
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