Monday, November 8, 2010

Indian Equities & Interest Rates

In March 2010, [normalising-policy-rates] we noted the following market consensus points: (a) The normalised policy rates for India are 5-6%, (b) We should get  there by year end and (3) A target of 8.5% on 10 yr G-sec is easily attainable.

We also ventured to say that the path of interest rates will critically depend on asset inflation and the time may be good for a contrarian long at 8-8.25. Thereafter we got 8.1 once, a rally to 7.35 and back to 8.15 and to 8. And policy rates are now 5.25-6.25% [only difference being market has been consistently on the right hand side of the corridor.. so there is that much more tightening that has taken place].

A new consensus now seems to build up viz., that we are done with the policy rates for now and G-sec should not typically exceed 8.15 and be broadly within a range of say 7.75-8.05 till inflation is on predictable path.  

Whle the current ranges seem broadly acceptable and do give a reason for the "Dec/Jan- PF" rally, the broad scenario does not appear good for interest rates. Firstly let us look at the Indian equities. After a sharp spike between March and October 2009, there was a long consolidation for an year or so. This gave way upside on the back of very strong inflows and inspite of all the talk on global double dip and relatively weaker global non-EM equities. Post the break, Nifty seems well on way to 6700-7000, with below 5800 and 5400 required for a game change 

The WTI-Crude (an important element in the Indian inflation) has so far behaved very similarly and is now threatening to break upside. A target of 100 doesnot seem out of reach, unless it settles back into previous range soon.

If food inflation not yet under control and fuel price inflation is set to pick up, the prognosis for inflation doesnot seem all that bright. How do the technical position on interest rates look?
Here is a chart on benchmark 10 yr G-sec:

and the benchmark 5 Yr OIS

Not surprisingly, the pictures look broadly similar to the above two [The G-sec is showing more of a broadening pattern than OIS] Can we expect an upside break?

I feel that yes. The interest rates do look readying for an upside.. May be little more lulling us on the downside that all is well on fundamental counts. A target of 8-8.5% on OIS and 8.5-9% on 10 year look plausible. A sharp reversal in Fx inflows and a sell off in asset prices (say below 5400 on Nifty and 75 on Crude) are required to change the scenario but on balance the risk seems to remain on the upside!

Having said that, it may be worthwhile noting that these potential spikes in OIS & G-sec are part of what looks like a corrective upmove, and hence the sharp spikes are good entry points for longs. 



Anonymous said...

yes kng ur right.
We are close to end of wave B which is in 3 subwaves , A too was in 3 sub waves. If both are 3 then last one can be of 5 waves to make a flat....
Only point here is whether 5th of c already completed or still pending. 5800 is key level to decide that , If this level holds in next move down (which i label as e) then it will be clear that 4th was goin on of c of bigger B and new highes can be seen. If not then we all know what will happen.....

KRG said...


If we go by the time targets for the C of major B, I guess there is quite some time left for it to complete. So either a sideways or an upward drift for a while in equities is my preference. On your count, I feel that the starting point of your c of B (i.e.Feb '10) may have to be shifted to May '10.

This would put the move from March 09 to Oct 09 as "a" of B; Oct 09 to May 10 as "b" of B (in your count the time taken for "b" is less than "a" which may not be appropriate).

If the "c" has started in May 10, it could go on till atleast May 2011 !


Anonymous said...

i could not figure out how u came to time stamp of c extending till may 11.

but what i saw was; it took 7 months to complete a from oct 08 lows to march 09 high as zigzag ,
again 7 months ( as u say ) for b as triangle,but major top of 6345 is already been made before 7th months. lets c if on time basis it reverses from jan 1st week...

KRG said...

well.. going by Neely's concept that if a=b in terms of time, c is likely to take a+b, I took approx 1year as the time frame for c. May be it will be slightly more

Anonymous said...

then in that case 5800 is base for this market and we are to see new highes... btw can u upload neely's current count !!

KRG said...

Neely's paid service is on neowave dot com

For his long term count on S&P pls take a look at the following

Jatin said...

thnks for the link

Anonymous said...

would love to read more from u !!

KRG said...

Thanks for the interest. Will try. Generally of the opinion that if you cann't say anything interesting or different, why say it? Also think that even good blogs suffer from the fact that they tend to get repetitive becos of this... Part of conditioning I guess!!

Have a good one... And watch your reliance closely.. I don't know how many sideways moves more!! But odds do favour upside break..