China and India’s accommodating policy stance

China's money market liquidity to stay ample. India curve facing steepening bias.
Nathan Chow, Radhika Rao03 Oct 2019
    Photo credit: AFP Photo

    China: money market liquidity to remain ample 
    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.

    India: Steepening bias heading into Friday’s RBI decision
    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.

    Nathan Chow

    Strategist - China & Hong Kong

    Radhika Rao

    Economist – India, Thailand & Eurozone

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