Indian Swansong

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Author: Nilotpal Addy

“Fragility is the quality of things that are vulnerable to volatility.” – Nassim Nicholas Taleb

Indian markets have been the king of swings in the past few weeks. Pick up any asset class that you may, and you will be enthralled at the volatility this market has provided to its investors. It was not long ago when the Bunds swung from 0.05% to 0.50%, which left many bond traders across the world gasping for breath. Wait till you look at the below data and determine where the Indian markets fared in this royal rumble:

India 10yr Benchmark (Old)old
Source: Bloomberg

India 10yr Benchmark (New)new
Source: Bloomberg

India 1yr OIS
Source: Bloomberg

India 5yr OIS
Source: Bloomberg

If you were wondering these were triggered by fears of Grexit and a possible surprise rate hike by the Fed in June, you would be caught on the wrong foot. If you notice the graphs carefully, it is evident that all of these market actions got triggered on 2nd June – the D-day when the Central Bank of India (RBI) under the helm of the able Dr. Raghuram Rajan announced the June Monetary Policy. The market was expecting a 25 bps rate cut on the back of easing inflation in the country. The fact that inflation was moving in line with the guidance set by the RBI under recommendation from the Urijit Patel Committee targeting 6% CPI inflation by January 2016 increased the market mojo. There were players who even expected a 50 bps rate cut with 25 bps being front loaded (just in case the RBI fell short in countering the Feds rate hike move later).

If you ask me, I believed that a rate cut was not in the offing. This was simply because Dr. Rajan has always been skeptic in his moves. More often than not he has disappointed the market punters by staying put (he put a rate cut on hold from September till December 2014 until he decided to give in with a surprise rate cut in January 2015, not so much of a surprise for a few considering he cut immediately after the CPI numbers continued to confirm a declining trend). If we were to look at the state of things when he was handed the mantle from Dr. Subbarao, you can’t really blame him for this approach. The Indian economy was in tatters, the world had started to give up on the Indian markets, and the currency was untamed (to name a few problems he had to deal with).

So much for all the expectations, Dr. Rajan delivered a 25 bps rate cut. But that is not what he just did. Being his usual self, he left the market with no clues for the next elusive rate cut. He had his doubts on the upcoming monsoon, and rightly so after predictions of another weak monsoon. He alarmingly left the market to fend for itself amidst multiple other geopolitical and economic concerns. Meanwhile at the other end of Asia, the Chinese equity markets had almost doubled since the start of the year. Foreign investors found the perfect excuse to take money out of the Indian markets. Rates traders started to shrivel, and the market started its swansong.  Bond/OIS started moving in a haywire fashion until inflation seemed to be taking a strong stand. CPI last month came in at 5.10% which was pretty much as per expectations. This was followed up by a decent trade deficit of $10.40 bn., which gave the markets a much needed booster to crawl up from the bottoms.

Last week Govt. of India along with the RBI decided to mark up the FII bond investment limit in India from USD to INR. The current bond investment cap is at $30 bn which has been set at somewhere around INR 50. Spot is currently trading at levels around 63.50 – 64.00. So this means a possible increased investment limit of $8-9 bn. This has provided a much needed fillip to the bond yields, which has now rallied from 7.88% to current levels of 7.70% – 7.75%. With Greece talks in its last leg and an expected Fed rate hike in September (25 bps hike expected), the upcoming weeks will determine the direction for the markets.

As I am writing this, there is some positive news trickling in for a renewed Greek settlement. I can already see some flutter happening in the markets. Bond and OIS markets have started to book some profits. Markets seem to be calming down now a bit as we brace for some movement in the commodities space. I am looking forward to the next set of data due early next month. Till then look out for this space, as I go fishing for some fresh cues in this appalling Mumbai rains!

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