REPO RATE CUT, INFLATION FORECAST DOWNGRADED

Highlights:

-GLOBAL and INDIAN MARKET DEVELOPMENTS

-DATA HIGHLIGHTS AND FX MARKET DEVELOPMENTS

-TECHNICALS

-STRATEGY FOR HEDGING AND SUGGESTED PORTFOLIO

-DATA AND EVENTS FOR NEXT WEEK.

Major economic events:

-RBI cuts repo rates, downgrades inflation forecast.

-US-China trade deal, Brexit issue to guide market movement in coming weeks.

Important developments during last week:           Rupee closed at 71.31 as against prior week close of 71.24. Rupee is caught between worries over real fiscal deficit situation and external developments which are positive for Rupee. Rupee is now closely linked to Indian yield movement, which is directly correlated to liquidity, inflation and Govt borrowing programme. Govt is expected to borrow more than 6 lac cr in next fiscal, which could tighten liquidity and stem Rupee gains. On the contrary, Fed’s dovish stance and weak growth in Europe are emerging as long term positives for Rupee.

RBI cut rates by 25 bps and shifted to neutral stance. Inflation forecast was reduced with Q4 CPI forecast at 2.8%. H1 2019-20 inflation is expected to be 3.2-3.4% and H2 inflation is expected to be below 3.9%. This paves the way for more rate cuts. GDP for 2018-19 is expected to be 7.2% and 7.4% for next fiscal

In other measures, RBI scrapped FPI limit of 20% in single corporate paper and banks are to assign risk weightage for NBFC lending as per credit rating. Farm loan collateral has been enhanced from 1 lac to 1.6 lacs.

FII’S have bought Rs 2517 Cr of Indian Equities in Feb. FII’S have bought Rs 2013 Cr of Indian Equities in this calendar Year till date. FII’S have sold Rs 2699 Cr of Indian debt securities in Feb . FII’S have sold Rs 5300 Cr of Indian debt in this calendar year till date.

USDINR is expected to trade in the 70.10-71.80 range in coming weeks.

Global developments: Fed and other major central banks have shifted to dovish stance indicating cautionary approach as Global economic slowdown looms. EU growth has been downgraded and uncertainity over US- China trade talks and Brexit issues remain. Though US President is unlikely to meet his Chinese counterpart in Feb, there is an expectation that US will refrain from slapping 25% tariffs on Chinese items w.e.f from March 1 st. This is imperative to avoid financial market volatility and give some more time and space for successful conclusion of trade talks.

BoE left Bank rate unchanged at 0.75% today. Asset purchase target was also held at GBP 435B. Both were done by unanimous 9-0 decision, as widely expected.

In the accompanying statement, BoE noted that growth slowed in late 2018 and “appears to have weakened further in early 2019”. Such slowdown “mainly reflects weaker global activity and Brexit uncertainties. BoE reiterated that the outlook will “continue to depend significantly on the nature of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond”.

European commission slashed EU growth rate from 1.9% to 1.3% for 2019. The commission also pointed out there is “a high level of uncertainty” surrounding the outlook, and the projections are subject to downside risks. Risks include trade tensions, slowdown in China, global financial markets and emerging markets risks, as well as Brexit.

Important developments for next week: Indian IIP, CPI

Important levels to watch for are: 1) EUR/USD: 1.1270 on the downside and 1.1520/1.1580 on the upside. 2) USD/INR Supports: 71/70.85/70.10 on the downside and 71.80 on the upside.

Market developments:

-Indian Nifty closed at 10943.

-Gold closed at 1318 and WTI Crude closed the week at USD 52.70.

-Indian 10 Year G-SEC closed the week at 7.34%. US 10 Year Yield closed at 2.65%.   

Data Highlights of last week:

-US factory orders declined -0.6% m/m.

-US trade deficit narrowed to –USD 49.4 bn in Jan.

-US Weekly jobless claims dipped to 234k.

-US ISM(non mfrg) declined marginally to 56.7.

-EU PMI(services) climbed to 51.2.

-EU PPI declined -0.8% m/m and sentix investor confidence dipped to -3.7.     

-German factory orders declined -1.6% m/m.

-German industrial production declined -0.4% m/m.

-UK PMI(construction) declined to 50.6 and PMI(services) dipped to 50.1.       

Technicals:

USD/INR : Spot closed above 20,50 and 200 day moving averages but still below 100 day major moving average. 20 day moving average     is at 71.25. 50 day moving average is at 70.80. 200 day moving average is at 70.10. Daily MACD is in buy zone, implying bottom at 69.20. Important support zone is at 71 and later at 70.85.

EURO/USD: The pair is below 200 day moving average. Next Major resistance is at 1.1520 and later at 1.1570. Major support is at 1.1265/1.12. Daily MACD is in sell zone, implying an important top at 1.1520. Weekly MACD is in buy zone, implying important bottom at 1.1215.

GBP/USD: The pair is bullish and trading between major moving averages.Daily MACD  is in sell zone, implying important top at 1.3220 and weekly MACD is  in buy zone, implying important bottom at 1.2440. Important resistance is at 1.3220. Important support is at 1.29 and later at 1.28.

USD/YEN: The pair is below major moving averages. Daily MACD is in buy zone, implying important bottom at 105. Next important resistance is at 111/112.

Suggested Portfolio: 1) Sell USDINR on rally with stop loss at 71.80.        

Strategy for USD/INR:  USDINR payables can be covered from cost angle.              

Hedging suggestion:  Considering the volatility in the markets, suggest hedging of Currency exposures be done from costing/affordability angle.

Currency Map:

Data and Events for upcoming week: US Data: CPI, PPI, Industrial production, retail sales, weekly jobless claims, Ny mfrg index  EU data: industrial production UK: Industrial and manufacturing production, CPI, RPI, PPI(output), retail sales Japan: