Liquidity surplus to tighten this week - Money Market View - Kotak

Liquidity surplus to tighten this week. The liquidity conditions tightened marginally with the average liquidity surplus at ~Rs 2.77 tn for the week ending Aug 19 compared to Rs 2.8 tn for the week ending Aug 11. A CMB maturity of INR 300bn was not rolled over. The overnight rates fell during the week Average for the week was ~5.70% compared to prior week's average of 5.87%. We expect the average rates to continue to trade below the repo rate during the week. We expect liquidity surplus to tighten this week led by regular gsec, SDL and T-bill auctions amidst limited inflows.

Government's cash balance turns positive. The Government has repaid the entire WMA as on Aug 11 from Rs 554 bn as on Aug 4 led by inflows from RBI dividend, tax receipts and auctions. Our calculations show that government probably has a surplus of ~Rs 400bn currently. Given that the government's fiscal deficit has reached 80.8% of BE in 1QFY18 itself, with the spending at 30.3% of BE, we expect a significant build-up in the cash balance from henceforth.

Weekly pace of currency in circulation picks up again. CIC for the week ending Aug 11 increased by the fastest pace in the last 8 weeks, rising by Rs 187.2 bn to Rs 15.7tn. Seasonality suggests that the following two weeks data should show dipping again of the pace of CIC. The CIC now stands at ~10.54% of FY2017 nominal GDP. Prior to demonetization, this number was around 12%.

Rates and Macro Monitor

Bonds trade sideways. The bond market opened last week on sluggish note on account of fears of geopolitical tension with China. Besides, being shorter week, traders were likely keeping their positioning light,. The sentiments got worsened owing to higher-than-expected CPI inflation print. July CPI inflation accelerated to a three-month high of 2.36% from a record low of 1.46% in June, led largely by surge in food inflation. Core inflation picked up to 3.80% in July (from 3.73% in June). However, dovish RBI minutes and lower global yields helped ease some pressure off Indian bond market, as we ended the week. The benchmark 10-yr yield eased 0.6bps WoW. This week is light on domestic data. All eyes will be on the Jackson hole Symposium this week for any policy stance surprises from the ECB and Fed. However, going by their recent minutes and data prints, likelihood of any new information on tightening of their policy stance is quite low. Amid lack of definite triggers, we expect 10-yr yield to trade in the range of 6.47-6.55% through the week.

Corporate bonds see sluggish activity. Market sentiment were sluggish for most part of the short week, mirroring the movement in Gsec. Levels across the curve were higher over the week by about 2-4 bps across the curve. On the supply front, we saw very muted supply since we had a shortened week owing to holidays . We saw around Rs. 3500 Cr of Corporate bond supply with Tata Sons(Rs. 2200 Cr) being the marquee issuance for the week. Pipeline for coming weeks include issuance from REC and IRFC.

MPC minutes: emerging growth concerns. The August 1-2 MPC meeting minutes were mildly dovish with almost all members acknowledging the recent fall in inflation and its core components and fading immediate upside risks along with concerns on weaker potential growth owing to debt overhang of companies and banks and other infrastructure bottlenecks. Dr Viral Acharya maintained that there is not much further rate cuts can do to address the symptoms of twin balance-sheet problems and instead this could even backfire by misallocating investments and fueling asset price inflation. Dr Dholakia argued for 50 bps cut as he expects CPI inflation (ex-HRA) to undershoot RBI's end-March 2018 forecast of 4% by 50bps. On the other hand, Dr Patra argued for no rate cut stating that in a forward-looking inflation targeting regime, a rate cut will undermine credibility when inflation is set to rise in a couple of months. With RBI's downward revised trajectory now mostly in sync with our estimated inflation trajectory, we reiterate our call that RBI will pause for the rest of FY2018. However, we remain watchful of the incoming data and reckon that room for any further cut can open up again if inflation surprises below the expected trajectory on the back of (1) improvement in food supplies amid a good monsoon, (2) imported disinflation due to INR appreciation and (3) downward surprise of core inflation.

Source : Equity Bulls

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