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Consolidation Sets In Amid Lack Of Fresh Catalysts

Friday, March 27, 2015
By A Business Reporter

This after Bond and equity markets had been in a bull-run since early 2014, with yields down 90-100bps and equities up >30%

The absence of domestic and external catalysts has left Indian asset markets in a consolidative state. This after Bond and equity markets had been in a bull-run since early 2014, with yields down 90-100bps and equities up >30% . “After last year’s gains, it is not surprising that markets are lately in a correction and consolidative phase. A break on either side will be in check in the near-term on dearth of fresh drivers. Comparatively, USDINR has held stable, helped by active RBI presence” says DBS Bank, India..

According to it “Externally, there is still uncertainty over how the US Fed rate expectations will evolve. At March FOMC, the Fed removed the word “patient” from its statement, but a change in economic estimates and associated remarks led to a more dovish interpretation of the rates trajectory. Data has been on the softer side this past month; barring new homes sales and unemployment rate (see Daily on 25 Mar). Thereby, as risks of US Fed action fade in and out, markets are likely to opt for a wait-and-watch stance. The ECB meanwhile continues to bask in the economy’s gradual recovery, just as QE gets underway.

Domestically, the incremental reform process is ongoing, with passage of the insurance FDI, mines & minerals and coal mining bills keeping hopes up. Efforts to pass crucial amendments to the Land Acquisition Act of 2013 however have met resistance. Focus is on how the government will push this agenda, especially as the difficulty in acquiring land is amongst the foremost hurdles for stalled/ greenfield projects and investor community at large.

On growth, most indicators point to growth bottoming out and getting off its back at a gradual pace (see Daily note 24 Mar). But the upturn is not as strong as the new GDP series appears to suggest. Besides, corporate earnings were also observed to be tepid late last year and not to a bullish start to 2015. In this respect, Reserve Bank of India (RBI) meeting in early-April is likely to be the next focus point. After the off-cycle cut in Mar, no move is likely in Apr, but accompanying remarks will be of interest. Inflation has bounced off Nov’s low of 3.3% YoY to 5.4% in Feb15, but still below Jan16 target. The recent bout of unseasonal weather developments and hurt to selected winter crops might stoke worries over food inflation. Global fuel prices have also bottomed out in recent weeks, limiting further downside in inflation prints. A cautious policy statement might hurt optimism.”

Looking ahead, says DBS Bank, “we see room for another 25bp cut by June and pause thereafter, set against the likelihood of US rate hikes in 2H15, a narrowing output gap and our in-house expectations for gradual rupee depreciation in the quarters ahead.”

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