Liquidity surplus remained intact last week. The weekly average surplus remained intact at ~Rs 4.4 tn for the week ending Apr 15 as against Rs 4.3tn the week prior ending Apr 7. Our calculations suggest that government's surplus with RBI currently is likely to have reduced by ~400bn to around Rs 550bn, compared to ~Rs 950 bn in the previous week, on the back of continuous government spending. With RBI having announced the MSS calendar worth Rs 1 tn through four weeks, system liquidity is likely to tighten. This is likely to harden the money market rates by 10-15bps. Despite the MSS, we expect the systemic liquidity to continue to remain significantly in surplus (Above Rs 2tn), through most of 1HFY18 . Amid push and pulls from factors like regular coupon inflows and auctions, continued currency drain coupled with Rs 250bn of MSS issuance, we expect system liquidity to tighten this week.
Pace of currency in circulation begins to fade. While maintaining the uptrend, the pace of weekly increase in currency in circulation (CIC) has been waning. CIC for the week ending Apr 7 witnessed an increase of Rs 264bn to Rs 13.6tn now compared to the 2017 weekly average of Rs 357bn. This roughly forms around 9.1% of nominal GDP compared to ~12.4% prior to demonetization.
Incremental credit-deposit ratio continues to improve. Deposit growth has maintained its deceleration from the recent highs of 15.9% witnessed during demonetisation but continues to outpace credit growth. Deposit growth is at 11.8% against credit growth of 5.1% as on Mar 31. Encouragingly, the incremental credit-deposit ratio surged to 42.78 for the fortnight ending Mar 31 compared to 26.02 in the previous fortnight and lows of 8.28 witnessed in the fortnight ending December 23.
Rates and Macro Monitor
Brief rally in bonds but the bears still in sight. Bond markets started the previous week cautious in the absence of significant cues. The benchmark 10-yr yield surged ~8bps in the beginning of the week to the weekly high of 6.885%. Reversing the recent sell-off, value buying ahead of expectations of benign CPI inflation along with slide in US treasury yields amidst global risk-off sent the 10-yr yield ~12bps lower to recent lows of 6.766%. US 10-yr yield fell by 17bps WoW to ~2.20% on escalating geopolitical tensions. The bond markets further got supported by weaker than expected CPI inflation data coupled with weak IIP growth. However, most of the weekly gains in 10-yr were erased after RBI devolved Rs 3216 cr of 6.97% GS 2026 paper on the primary dealers. The 10-yr yield ended the week flat at ~6.82% and has opened the week with a weakening bias. Meanwhile, across rest of the curve, yields inched marginally lower. For this week we expect the benchmark 10-yr yield to hover around 6.80%-6.90%.
Corporate bond curve sees parallel dip. The week saw good buying interest in the Corporate Bonds. Buyers ranged from FPIs, MFs, participants like Insurers and Banks joined the party later. The curve saw a dip of 7-8 bps during the week. The 3-5 year segment saw interest from FPIs and MFs whereas the longer end got support from the Retiral funds and Insurers. Primary space was mainly dominated by the NBFC issuances, other issuers preferred to stay on the sidelines. With the announcement of Rs 1 tn of MSS issuances, it remains to be seen how the short end yields behave. We can expect issuances from HUDCO, NHPC, PFC in the coming weeks.
Production falters amidst benign inflation. CPI inflation accelerated to 3.81% in March compared to 3.65% in February led largely by unfavorable base effect and pickup in core inflation. Food inflation remained nearly flat at 1.93%. Fuel and light inflation surged to a 19-month high of 5.6%. Core inflation inched marginally higher to 4.79% from 4.75% in February. We expect CPI inflation to continue to remain at sub 4% in 1HFY17 led largely by favourable base effect. Further surprising on the downside, WPI inflation slipped to 5.7% compared to 6.55% in February and market expectation of 6%. Meanwhile, February IIP growth surprised on the downside at (-)1.2% with across-the-board sequential contraction. While mining sector production expanded 3.3% along with electricity production growth of 0.3%, manufacturing sector growth was at (-)2%. Capital goods production contracted 3.4% while consumer goods contracted 5.6%.