<b>Devangshu Datta:</b> Highs, lows and news-based triggers

Indian markets saw partial recovery last week after a steep sell-off. There will be lots of macro-economic data to digest as markets reopen after the Easter weekend. Dalal Street will be primarily looking to the Reserve Bank of India (RBI)'s policy review on Tuesday for a sense of direction.

America will be digesting the implications of weaker than expected job creation in February. German and French trade and industrial production numbers are expected this week. The Bank of England (BoE) and the Bank of Japan (BoJ) are both due for policy reviews. Japan released weak industrial production numbers, last fortnight.

India's economy may be pulling out of demand recession. But the signals are still not definitive. Automobile sales aggregated across segments grew by 9 per cent through 2014-15 over 2013-14. This is after two successive years of contraction. Even so, commercial vehicle sales and tractor sales declined, indicating some key end-user segments are not doing well.

Indian corporates made many bond issues across the January-March quarter. Proceeds from external issues hit $15 billion, up about 30 per cent over the January-March 2014 period. Reliance Industries was among the largest external commercial borrowing issuers, raising just under $1 billion.

Domestically, bonds worth over Rs 76,000 crore were issued, an increase of 34 per cent over January-March 2014 when Rs 57,630 crore was raised. Power Finance Corporation (Rs 4,440 crore), Rural Electrification Corporation (Rs 2,325 crore) and Power Grid (Rs 2,580 crore) were among the major issuers.

Bond action could mean a restart for the private investment cycle. However, non-food bank credit growth dropped to 21-year lows of below 10 per cent in March. The dichotomy between bond market and commercial borrowing patterns might be partly explicable. The RBI's last two rate cuts have translated into lower bond yields. Now, banks might cut rates to stimulate credit demand, even if the RBI maintains the status quo.

The Securities and Exchange Board of India has eased guidelines for the conversion of bad loans into equity, which should help banks in the long-run. The RBI reckons bad or restructured loans account for over 10 per cent of total lending. India Ratings and Research estimates impaired loans could hit 13 per cent of total lending by March 2016.

The RBI will probably not cut rates on Tuesday. Raghuram Rajan may decide to wait on the BoJ and BoE policies. He must also gauge what the US Federal Reserve is likely to do. Only 126,000 non-farm jobs were added across the US economy in March. This was a disappointment since every month between March 2014 and February 2015 had seen over 200,000 new jobs created. If the US economy is slowing, the Fed may renew its pledge to be patient and not raise rates in mid-2015. Such a perverse interpretation could see US equity surge on weak macro-economic data.

 

Whatever happens, the RBI will continue to boost reserves. Exports have slowed. The rupee is about 24 per cent over-valued, if we go by the real effective exchange rate (REER). Historically, the RBI has tried to hold the REER over-valuation to within about 5 per cent.

The inflation targeting mandate certainly has changed but so long as FII and FDI inflows are strong, the RBI must buy dollars to prevent further rupee appreciation. Reserves have already hit a record $341 billion, which is about 10 months of import cover.

The new foreign trade policy sets an ambitious target of trying to grow exports by 200 per cent (from the current $310 billion to over $900 billion) by 2020. The rupee will require smart management to stand a chance of achieving that target.

Meanwhile, the escalation of conflict in Yemen has triggered fears of a crude supply squeeze. But conversely, sanctions against Iran could be relaxed, leading to oversupply and further falls in crude prices. Low crude prices guarantee a manageable current account deficit, while adversely impacting the valuations of oil PSUs. Hence, stake-sales in ONGC and Indian Oil Corporation (IOC) may be postponed. ONGC faces lower realisations, while IOC has taken a big inventory write-down as crude prices have fallen.

Technically speaking, the Nifty hit a record high of 9,119 on March 4, and subsequently retracted to a low of 8,269 on March 27. It has since recovered to near 8,600. The index could trend up, or fall again, or meander around without a clear trend.

There are multiple potential news-based triggers, so the pushes or pulls could be in any direction. The key levels to watch are 9,120 and 8,268. The former would be a breakout to a new high while a breakdown below the latter could test the 200-day moving average (currently near 8,200).