Kotak Rates Meter

June 17, 2019

Upasna Bhardwaj Avijit Puri

mail: upasna.bhardwaj@kotak.com mail: avijit.puri@kotak.com
Phone +91-22-61660531 Phone +91-22-61661547
 LiquidityMeter
System liquidity to turn into deficit this week
 System liquidity to turn into deficit this week. The liquidity conditions turned favourable through the course of the week, ending at a surplus of Rs575 bn on the back of
redemptions, OMO purchases and government spending, despite the outflows from excise collections. The average liquidity surplus for the week came in at Rs453 bn
against earlier week’s average surplus of Rs850 bn. Tracking favourable liquidity conditions, the weighted average overnight rates moved lower to 5.67% (well below the
repo rate of 5.75% on an average) against earlier week’s average of 5.79%. Meanwhile, the money market rates remained largely unchanged at the long end on the back
of muted demand, with the 1-Y CD trading around 7.25%. 3M-CDs traded in the range of 6.25-45%. We believe that the spread between the 1Y-CD rate and the repo rate
could come down if system liquidity surplus persists. We expect the system liquidity to turn into deficit this week as outflows from GST and advance tax collections, and
auctions are expected to outweigh the inflows from coupons, OMO purchases and government spending.

 GST and advance tax collection to support government’s cash balance this week. The government, expectedly, dipped into the WMA utilizing Rs425 bn for the week
ending June 7 to meet its aggressive spending requirements. Excise collections last week along with GST and advance tax collections this week would help in repaying the
WMA. We believe that government’s cash balance will remain under pressure in the coming weeks due to continued government spending.

 Increase in CIC remains tepid in FY2020. Even though CIC for the week ending June 7, 2019 rose sharply by Rs223 bn to Rs22.2 tn, CIC increase for FY20TD remains tepid.
The incremental CIC in first 10 weeks of FY2020 has been a mere Rs799 bn compared to Rs1.2 tn in the corresponding period last year. The current CIC outstanding is
~11.68% of nominal FY19 GDP compared to the pre demonetization level of around 12%.

Liquidity forecast during the week: June 17 – June 21 (Rs crore)

Amount Amount
Inflows Outflows
(Rs crore) (Rs crore)
Coupon inflows 10,303 Auction
Redemptions - T-bill 20,000
- T-bill 12,000 - State Govt 1,000
- State Govt - - Central Govt 17,000
- Central Govt - GST outflows 1,00,000
Net Government spending 50,000 Advance Tax 80,000
OMO Purchase 12,500 CIC (incremental) (13,000)
Total inflows this week 84,803 Total outflows this week 2,05,000
Net aggregate liquidity this week (1,20,197)
Liquidity as of June 15 57,489
Liquidity as of June 21 (62,708)
Source: RBI, CEIC, Kotak Economics Research estimates

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 Debt-o-meter
Surprise OMO purchase announcement fuels the rally

Source: Bloomberg, Kotak Economic Research Source: CEIC, Kotak Economics Research

 Surprise OMO announcement fuels the rally. Bond markets rallied sharply last week after the RBI’s surprise announcement to conduct a second round of OMO purchase,
thereby signaling its intent to keep liquidity in surplus over a sustainable period of time. Benign inflation print on the back of moderating core inflation and strong auction
demand further fueled the rally in the bond markets. Ultimately, the 10-year bond yield softened by ~5 bps WoW to close at 6.92%. The bond markets had a weak opening
today; the 10-year bond yield is currently trading at 6.95% on the back of higher oil prices. Oil prices have gained by 4.2% from the lows of US$ 59.57 a barrel on account of
geopolitical tensions. We expect the 10-year bond yield to range between 6.85-7.05% this week as markets await the MPC’s minutes and the outcome of the Fed
meeting. The markets will also carefully track the movement in oil prices. In the corporate bond space, HUDCO, NABARD, PGC, THDC are expected to issue bonds this
week.

 CPI inflation as expected, IIP growth surprises. May CPI inflation inched higher to 3.05% as against an upward revised print of 2.99% in April. The continual gradual increase
was on expected lines with food inflation contributing mostly to the increase (1.8%yoy against 1.1% in April) even as core inflation moderated (4.1% as against 4.6% in
April), keeping the headline CPI inflation broadly in check. On the policy front, the latest inflation print along with the MPC’s accommodative stance and worries on
weakening growth impulses reaffirm our call for another 25 bps cut in August. Further cuts would hinge on how the growth-inflation mix evolves. As per our base case,
upside risks to food inflation in 2HFY20 could limit rate cuts beyond August. Meanwhile, IIP growth, surprisingly, firmed up to a six-month high of 3.4% in April (0.4% in
March). We are a bit surprised with the growth in capital goods and consumer durables segments given the slowdown in the auto/auto ancillaries’ sector (contributing to
around 30% of capital goods and 40% of consumer durables).

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 Flowsmeter
FPI debt and equity flows moderate marginally
(US$bn) FII net Equity FII net Debt Total
1QFY18 1.8 10.1 11.9
2QFY18 (3.0) 5.4 2.4
3QFY18 2.5 2.9 5.4
4QFY18 2.1 0.2 2.4
1QFY19 (2.7) (6.4) (9.1)
2QFY19 (1.4) (1.0) (2.4)
3QFY19 (2.6) 0.4 (2.2)
4QFY19 8.2 1.3 9.5
Apr 2019 1.5 (1.6) (0.0)
May 2019 1.4 0.5 2.0
Jun 2019 0.1 1.1 1.2
Sum FY20TD 3.0 0.1 3.1
Sum FY19TD (2.3) (5.3) (7.7)

Source: Bloomberg, CSDL, Kotak Economic Research

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 WSS Tracker
Credit-deposit growth remains firm

Outstanding as on Change this Change in

Y-o-Y growth
May 24, 2019 fortnight last fortnight (Rs
(Rs bn unless mentioned)
(Rs bn) (Rs bn) bn)

2018 2019
Aggregate Deposits 124,985.5 –189.0 335.8 8.1% 10.1%
Demand 13,131.9 24.8 –410.0 922.5 1,433.1

Time 111,853.5 –213.8 745.8 7,610.1 10,024.1

Bank Credit 96,225.9 –34.2 50.6 12.8% 12.7%
Food 657.2 40.2 185.4 –77.9 128.1
Non-food 95,568.7 –74.4 –134.8 9,759.9 10,721.2

Investments in Govt. securities 35,172.8 104.1 525.4 1,624.8 1,446.0

Investment in other approved

19.3 0.8 6.7 –5.6 7.2
securities
Credit-Deposit ratio (%) 76.99

Incremental C-D ratio (%) **

Investment -Deposit ratio (%) 28.16

Money Supply 154,200.3 –197.6 613.4 10.4% 10.3%

Source: RBI, Kotak Economic Research
** Denominator and numerator negative

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