CNY Rates - With 1Y MLF rate kept unchanged last week, 1Y and 5Y LPR rates were expectedly kept unchanged yesterday at 3.65% and 4.30% respectively. News reporting of China banning Micron chips pushed 1Y and 5Y IRS lower by 4-5bps, as US-China tensions could be seen as aggravating factor weighing on sentiments and growth. 5Y IRS and 10Y CGB yields have fallen back to levels last seen in late October, just before reopening began in November - This clearly suggests that rates markets are very bearish on the growth outlook. Chinese equities appear to be less bearish, giving back only ~40% of the gains in the November- January period. Considering the already bearish pricing in rates markets and barring any major policy support announcements in the near term, IRS/CGB rates are likely to consolidate. On liquidity, we think it will be kept balanced due to prudent monetary policy. That said, if credit demand is weak in the coming months, conditions could turn out to be flusher and DR007 could fix frequently below OMO rate.
INR Rates - Concerns of tight liquidity are easing. RBI has switched to conducting 14D VRR auction to provide short-term liquidity; INR0.47tn was taken up on Friday against notified amount of INR0.50tn. Also, the RBI Board approved surplus transfer of INR0.87tn to Central Government for FY22/23, more than the budgeted INR0.48tn. Finally, the RBI announced the withdrawal of 2000 rupee banknotes from circulation. Members of the public may deposit banknotes into their bank accounts (adds to liquidity) or exchange them into banknotes of other denominations (doesn't add to liquidity). As of 31 March, the total value of 2000 rupee banknotes amounted to INR3.62tn. Our estimation sees the surplus transfer and deposit of 2000 rupee banknotes could add around INR2.50tn to banking liquidity, which is supportive of the bull-steepening we are seeing in domestic rates curves. From here, we expect RBI could subsequently switch back to conducting VRRR auctions to absorb some of the added liquidity and result in O/N call money rate averaging slightly above (5-10bps) the policy repo rate.
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