We expect continuation of RBI’s existing tight money policy
stance with some stringent import curbs, more export incentives and USD
mobilization drive, should tapering
begin forthwith.
The most keenly awaited FOMC meet would conclude today night. By
midnight (India time) we would perhaps know the likely US monetary policy
stance in near term.
A near consensus has emerged globally that the US Federal Reserve
(the Fed) may chose to moderate the current US$85bn bond buying program. The
debate is however limited to the pace of moderation.
The most popular view seems to be that Fed may begin with
US$10bn moderation and move cautiously after watching the market reaction.
Anything more aggressive (least likely in our view) might spook the markets and
result in a massive risk trade unwinding.
We have maintained that rather than focusing too much on what
the Fed does or Bernanke says in the post FOMC briefing, we should be carefully
watching how the global investors’ react post that.
A mass decision to wind up the USD carry trade may end up in
chaos in emerging markets which have benefitted from cheap and abundant USD
supply in past five years. Some data to watch closely would be USD Index,
Deutsche Bank AG’s G10 FX Carry Basket index, US 10yr yields, Gold, and EM vs.
DM equities ratio.
However, strategically, as we had suggested in one of our
earlier posts, we continue to feel that QE
is a matter of fact, not going anywhere in a hurry. It will remain till it
completely outlives its utility – not likely in next 3yrs at the least, most likely
till the time EU economy shows definite signs of revival, Japan achieves its
objective of creating nominal inflation in the economy and gets out of decades
of stagnation, and global trade rebalancing especially in relation to China
makes steady progress.
RBI has made it clear that in the short term its policy stance
would largely hinge upon the monetary policy stance of the US Fed. If the Fed
does decide to slow down its bond buying program as expected, additional
emergency measures would be needed to defend INR. In recent past we have seen
that INR is one of the most vulnerable EM currencies to unwinding of USD carry
trade.
We expect continuation of existing tight money policy stance
with some stringent import curbs, more export incentives and USD mobilization
drive, should tapering begin forthwith.
Notwithstanding, there could be a sharp rally in Indian equities
much like 2H1999 and 2H2007. The rally if occurs would be sharp, sudden and
shallow. Mostly exporters and sectors with most short positions (financials and
infrastructure) will participate in the rally; which would inevitable be
followed with even sharper correction. Expect short term rates to harden
further.
We suggest buying exporters (IT, pharma, autos), select infra
proxies like L&T, Cummins and top end financials (HDFC Bank) for a quick
near term trade.
For short (3-6months) term however we continue to remain
underweight equities and feel November 2013 – March 2014 period would provide
better opportunities.
Thought for the day
“I learned long ago, never to wrestle with a pig. You get dirty, and besides, the pig likes it.”
George Bernard Shaw (Irish, 1856-1950).
Word of the day
Edacity (n)
The state of being edacious; voraciousness; appetite.
(Source: Dictionary.com)
Shri Nārada Uvāca
The reactions of political parties and media to the recent violence in UP makes it clear that everyone wants to keep election agenda social and not economic.
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