Thursday, September 19, 2013

RBI Meet on 20th September - What To Expect - Desi QE Episode 1

So Uncle Ben decided to leave the QE untouched for now. Not the unexpected as I had warned in my outlook earlier this month i.e. US will continue with QE for as long as possible - period. Whilst many may argue for / against etc etc - markets have their own ways to make out what they want.

In a knee-jerk reaction, we may have global indices, commodities going on a roll leaving bears puzzled. As far as Nifty is concerned, the technicals remain unchanged as far as fundamentals are concerned, it is a different story all together.

Desi QE specialist, Raghuram Rajan holds his 1st RBI conference on 20th September and let us analyze what to expect. His debut was celebrated in style and his bold initiatives cheered. Inflation has shot up big time though currency stabilized by about 350 basis points. Now comes the Catch 22 situation from an Indian perspective.

Whilst the growth story demands that rates be cut, the latest developments make that a difficult option to take. Let us not forget that this meet is not just about interest rate decisions and CRR decisions but also about the guidance for the RBI. With new banking licenses set to be doled out and forex risks to be mitigated, the mainstream press and punters will be waiting with baited breath to take on senor Raghuram

Interest Rates: A rate cut is highly unlikely given the inflationary outlook and global liquidity. Thanks to US Fed, for now that part can wait

CRR: Expect a 25 basis points to 50 basis points cut in CRR to indirectly inject some liquidity

Currency Swaps: It will be interesting to see what is the guidance on this front. So far RBI has only announced swap measures with regards to USD-INR flows for the banks and OMCs. Luckily, Japan voluntarily came in and tripled the INR-JPY swap window to the tune of USD 50 billion equivalent this month (Point to note: Japan took lead in this step and not India!)

To save the rupee along with other EM currencies, it is very critical to have more partners on board for similar currency swap windows. With the recently concluded G-20 summit and BRICS discussion, it is very critical that at least with major trade partners like China, Thailand, Malaysia, Indonesia, South Africa, Russia etc to have INR-XYZ currency swaps that will be win-win situations on both sides. Unfortunately, it is highly unlikely as our central bankers seem to be happy with the fact that Iran accepts INR payments.

Moreover, politicians' vested interests lie in as many dollar transactions as possible!

Banking Licenses: This is one of the most absurd decisions seen ever. Rather than recapitalizing existing banks and moving towards consolidation (that will reduce a lot of fixed expenses and bring economies of scale) new banking licenses seem to be the flavor of the season.

Forward Guidance: Will be hawkish short-term and dovish long-term

As of now, the markets seem to have priced in a rate cut, CRR cut of about 50 bps. No QE tapering for now will keep rupee stable. So the upside on BankNifty maybe capped around the 10800-11000 mark.

3 major events were expected to rock the markets this week
1. US Fed Meeting: Uncle Ben gave markets reasons to celebrate
2. RBI Meet: Raghuram maybe hawkish and still get away with it for now
3. German Elections: Time will tell and as I have been repeatedly saying, this will be a potential game changer for global markets.

An interesting pair trade prior to RBI meet
Build a BankNifty Straddle with Oct 11200 Call and Oct 10200 Put with a combined cost of entry of about 250 per lot. Target Exit Points are 11000 or 10400 where in the pair will almost double. Keep a Stop Loss of 125 on combined value of the put and call.

Premium Invested: Apprx 250 x 25 = 6250
Maximum Loss: 125 x 25 = 3125
Potential Gain: 250 x 25 = 6250

Enjoy the new Desi QE version Episode 1

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