Asia Rates: Profit-taking in CNY IRS; RBI dividend and INR liquidity
CNY Rates - CNY IRS rates and CGB yields are slightly higher (~1-2bps) post Tuesday morning where April data releases (IP, retail sales etc) came in weaker-than-expected. This suggests that rates markets were already expecting April data to come in soft, likely due to earlier-released data points (trade, PMIs, TSF) that were already pointing to a moderation in recovery momentum in 2Q. There has also been some profit-taking this week, especially as CNY rates have rallied a lot over the past 3 weeks. Our forecast is for 10bps cuts to 1Y LPR in both 2Q and 3Q, which implies likely cuts to 1Y MLFs as well. On liquidity, we think it will be kept balanced and we are unlikely to see a return of the flush liquidity conditions seen across much of 2022. With some rate cuts already priced in, we expect CNY rates to consolidate in the second half of May around current levels.
INR Rates - Tight liquidity continues to be the key theme - Liquidity position is in small surplus of around INR0.6tn. Considering that RBI's stance is still "focused on the withdrawal of accommodation", injection of durable liquidity via CRR cut or OMO Purchases should be seen as unlikely. With USDINR creeping higher in May, RBI's FX intervention is likely to result in net withdrawal of INR liquidity. In the near-term, there is news reporting that RBI board will meet tomorrow to discuss dividend payout to the government. There are some expectations that the transfer amount could be much larger than the budgeted INR480bn (to be received from RBI and PSU banks), in which case, would be a material boost to liquidity.
KRW Rates - This week, Korea announced hikes to electricity rates and gas prices to try to contain the deterioration in financial positions of KEPCO and KOGAS (state utilities). While headline inflation has been trending lower, core inflation prints remain sticky and the announced utility hikes could create some upside risks to inflation. That said, our base case is that BOK policy rates have already peaked at 3.50% and further rate hikes are unlikely in light of the weak economic outlook. KRW IRS rates are expected to be stable, partly anchored by rangebound US rates. In addition, as long as BOK continues to push back against rate cut expectations, it would be difficult for IRS rates to price for more cuts and to fall from current levels.
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