Asia Rates: I-CRR to be discontinued in phases; Pay on dips bias for INR Rates
INR Rates - At RBI's review of the 10% I-CRR on 8 Sep, it was decided that the measure would be discontinued in a staggered manner, so that system liquidity is not subjected to sudden shocks. 25% of maintained I-CRR would be released on both 9 and 23 Sep, with the remaining 50% released on 7 Oct. The total amount of liquidity that had been impounded under I-CRR, and would be fully returned over the next 4 weeks, is around INR1.0tn. There was some easing of liquidity in early Sep due to government spendings, and the release of liquidity from I-CRR would help to offset tax outflows in the second half of Sep. Despite the announcement, we think the near-term outlook is still for call money rates to average in the top half of the LAF corridor, which would be an appropriate stance in the context of recent increased uncertainty over food prices and inflation.
We hold a pay on dips bias for INR Rates. 5Y OIS/NDOIS at around 6.80% is likely too high to pay, considering that we expect policy repo rates to have already peaked at 6.50%. We await better levels to pay at around 6.60-6.65%.
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