China and India’s accommodating policy stance
The People’s Bank of China skipped reverse repos on Monday, before the market closed for the National Day holiday from 1-7 October. With RMB20bn of reverse repos maturing, the authority effectively withdrew the same amount of money from the market. But that came after three straight weeks of cash injection amounted to RMB59bn. Money market liquidity remains ample. The yield of 3-month AAA negotiable certificates of deposit slid to the lowest level since August, while the yield spread between sovereign and AAA corporate bond also narrowed significantly. We expect domestic investors to increase their bond allocation as cash becomes cheaper and weak momentum spills into Q4. We retain our call for another RRR cut by December.
Consensus is for the RBI monetary policy committee (MPC) to vote for a cut this week, with the scale anywhere between 15bps to 40bps. Bond markets have transmitted rate cuts to a larger extent than banks' MCLRs. To improve transmission, the RBI has mandated banks to peg new lending rates on consumer loans to external benchmarks, starting this month. This will provide better premia transparency for consumers and lead to lower rates during an easy policy bias. Banks’ are, however, concerned over further compression to their NIMs as their funding leg is dominated by fixed/term deposits, which are not repriced as frequently.
An unchanged 2H borrowing schedule provided relief but didn’t fully allay fiscal slippage concerns. Monthly fiscal math will be watched for direct and indirect tax revenue trends which will become clearer in 4Q19 and dictate the need for a wider fiscal deficit. Apart from tax revenues, the math might require renewed push towards disinvestment, other support (dividend payout, subsidy rollovers etc) and expenditure curtailment. Prima facie, we see risks of a miss to the FY20 fiscal deficit target to -3.5-3.6% of GDP vs budgeted -3.3%. Reliance will be on the INR debt markets, as the maiden offshore bond issuance has been ruled out this year.
News of balance sheet troubles in non-banks continue to perturb credit markets. With non-banks’ preoccupied with deleveraging and sorting out their asset-liability mismatch, non-retail credit growth is likely to slow. Refinancing/ delinquency risks are being watched on case by case basis.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.