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

- Liquidity surplus to improve this week. The liquidity conditions tightened expectedly last week, with the average liquidity surplus at ~Rs 2.25 tn for the week ending Aug 25 compared to Rs 2.77 tn for the week ending Aug 19, led by outflows related to GST tax receipts and regular gsec, SDL and T-bill auctions. Liquidity surplus dipped sharply by Rs 855bn from Aug 19 to Rs 1.96tn on Friday, the lowest surplus seen since Jan 19, 2017. Accordingly, the overnight rates hardened during the week, with the average for the week being ~5.94% compared to prior week's average of 5.70%. We expect liquidity surplus to widen this week led by month-end government spending and heavy Gsec redemption, as auctions and OMO sale offset only part of the inflows.

- Government's cash balance turns positive The Government has dipped again into WMA by Rs 95.97bn as on Aug 18 from nil in the previous week. Our calculations suggest that GST related tax inflows would have brought the cash balance into surplus of ~Rs 200-300bn currently after having paid off the WMA. 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 gradual build-up in the cash balance from henceforth.

- Weekly pace of currency in circulation dips. CIC for the week ending Aug 18 increased marginally by Rs 11.7 bn to Rs 15.71tn. Seasonality suggests that the next data should show fall in CIC before picking up again. The CIC stands at ~10.54% of FY2017 nominal GDP compared around 12% prior to demonetization.

Rates and Macro Monitor

- Bonds trade sluggishly. The bond market opened last week on sluggish note, following global cues on fears of global geopolitical tension and any new monetary shocks from Jackson Hole Symposium. The sentiments got worsened owing to higher-than-expected SDL cut-offs and remained pretty much range bound after that. The benchmark 10-yr yield increased 2.5bps WoW. This week has started on a negative note specifically for the benchmark 10-yr paper, possibly due to some reallocation on the yield curve as markets are expecting a new 12-yr paper to be announced in this week's auction. This week there will be US NFP data on Friday and India 1QFY18 national accounts data release on Thursday. We expect the 1QFY18 real GVA growth to print 6%. Weaker growth print could reinstate expectations in some market segments for an increased probability of rate cut in coming months and may help bonds at the margin. However, OMO sale lined up this week may dampen sentiments marginally as well. We expect the benchmark 10-yr yield to trade in the range of 6.52-6.60% through the week.

- Large volumes issued in corporate bond segment. Last week we saw almost Rs. 20,000 cr worth of issuances with RIL(7500Cr), NHAI(5000 Cr) and REC(2500 Cr) being the notable issuances. The large supply resulted in yields inching slightly higher. 3yr AAA PSUs were trading at 6.87% almost 3 bps over the week. Going forward we can expect the negative bias to continue on account of large supply lined up (OMO Sales, Auction). Pipeline for this week include issuance from REC and IRFC.

- Jackson Hole conference added little new light on monetary policy. Jackson hole symposium added little new information on the potential conduct of near-term monetary policy by the Fed and the ECB. Fed Chair Yellen continued to stress on the weaker inflation dynamics and reiterated gradual withdrawal of easy monetary conditions . Meanwhile, ECB President Draghi's speech in Jackson Hole was a nonevent from the point of view of gauging the central bank's tapering strategy. The speech focused entirely on the global productivity challenge and how fostering global openness can help. As a result, it looks as if any clues about the ECB's tapering strategy will have to wait until the next policy meeting on the 7th September.

Source : Equity Bulls

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