India Morning Report (June 13, 2012 – Pre market Open) Already discounting the rate cut (Incl. Fixed Income Report)

indian equities started off a rally yesterday to upturn its nose to ratings agency S&P for daring to suggest India was closer to a downgreade two days before IIP announcements and a week before  RBI policy is expected to be announced.

Surprisingly, even naysayers, including us in this cycle who thought RBI need not cut rates now have been silenced by the intervention from S&P. While fortunately there have been India Bulls that have defended India saying this is the bottom of the barrel for India’s raft of bad economic data in the last six months there has been a precocious turning down of yields in the fixed income markets pointing to a massacre on Monday if rates are not cut by the RBI.

India 10 Y yields are trading at 8.06% having started the week at a low 8.14% from before the S&P announcement, thumbing the nose at Cassandras of doom. Again though not unsinged even in fully hedged trades, I recommend staying away for this entire rally in terms of ne positional trades and let your existing holdings and positions enjoy the sunlght till the RBI policy hour as expectations become clear.

Though it has not been opportune to say that Indian Capital Markets are thumbing a nose at short-term flows from India oriented FII investors at these high levels (FII also took positions in January to INR 450 B) it is foolhardy to stop the market to its 5400 levels as the underlying fundamnetals have not changed for India despite the statistics.

Yields are likely to stay below 8% and the standoff ith the RBI trying to absorb more on the existing 10 Y bonds turned out to be till only an absorption of INR 900 B on the 10 Y bond released in November, now having gone for the new 10 Y paper with a coupon of 8.15% Traded vbolumes in the G-Sec market doubled according to a DNA report

Also seemingly RBI is still conducting OMOs to enhance liquidity and the new Government borrowing programme is as much a challenge as ever despite the liquidity conditions being better. That hoever means the Rupee will start trending up firmly after Monday again keeping the impending correction in equities away but this week may trade weaker esp today’s continuation from yesterday’s Dollar rally as the Euro gets extinguished again overnight.

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