Asia Rates: Tighter liquidity in China and India; Hibors to stay low till quarter-end

Tight liquidity in China and India.
Group Research, Duncan Tan31 Aug 2023
    Photo credit: Unsplash Photo

    CNY Rates - Onshore liquidity tightness around month-end appears to be more pronounced than usual, with R007 and DR07 fixings climbing to 2.40% and 2.30% respectively. This is even though PBOC has been net injecting liquidity since the 25th via OMOs. We don't think that the tightening of offshore liquidity and higher CNH implied yields, aimed at squeezing speculative short positions on the RMB, have had a visible impact on onshore funding rates. Rather, despite the continued softness in China growth momentum and sentiments, policymakers have not engineered looser onshore liquidity conditions. This week, there has been news reporting of more deposit and mortgage rate cuts, which could open up modest downside room for onshore IRS rates to fall. For us to be confident that IRS rates are close to bottoming, we would need to see the weight of macro support shift away from rate cuts and towards fiscal stimulus and meaningful measures to boost the property sector.

    INR Rates - System liquidity has evidently tightened since the implementation of 10% I-CRR, with call money and repo (market, TREPS) rates rising to the top of LAF corridor. We expect the 10% I-CRR measure to be removed upon scheduled review on 8 Sep, so as to return liquidity to the system ahead of festive season, meaning that money market rates are likely to moderate after 8 Sep. Retail prices of tomato are retracing lower - From peak of INR140/kg on 4 Aug, prices are back down to INR58/kg, as compared to INR20-25/kg range prior to the recent spike. While other food items such as rice and pulses would still need to be monitored, the retracement in tomato prices would help to ease inflation worries and associated upside pressures on OIS rates.

    HKD Rates - Hibor rates and EFB yields have kept declining in August - O/N Hibor has fallen from a high of 5.60% at end-July to 1.77% yesterday. We expect demand for HKD liquidity to stay relatively low for the coming weeks, up until September quarter-end which will likely be the next major tightening episode for Hibor. With USDHKD rebounding in August to around 25-30pips from 7.85, weak-side CU could be triggered again soon and push Aggregate Balance lower. This is especially as T/N forward points have fallen to -5 to -6 pips per day, levels which should draw good interest in the buy USD vs sell HKD carry trade. Even if Aggregate Balance is further reduced, it doesn't change our view of demand for HKD liquidity and Hibor rates staying low for much of Sep.

    Duncan Tan

    Rates Strategist - Asia

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