Asia Rates: CNY Rates bearish on growth; Easing INR liquidity

No change in China’s LPR rates; RBI providing short-term liquidity
Group Research, Duncan Tan23 May 2023
    Photo credit: Unsplash Photo

    CNY Rates - With 1Y MLF rate kept unchanged last week, 1Y and 5Y LPR rates were expectedly kept unchanged yesterday at 3.65% and 4.30% respectively. News reporting of China banning Micron chips pushed 1Y and 5Y IRS lower by 4-5bps, as US-China tensions could be seen as aggravating factor weighing on sentiments and growth. 5Y IRS and 10Y CGB yields have fallen back to levels last seen in late October, just before reopening began in November - This clearly suggests that rates markets are very bearish on the growth outlook. Chinese equities appear to be less bearish, giving back only ~40% of the gains in the November- January period. Considering the already bearish pricing in rates markets and barring any major policy support announcements in the near term, IRS/CGB rates are likely to consolidate. On liquidity, we think it will be kept balanced due to prudent monetary policy. That said, if credit demand is weak in the coming months, conditions could turn out to be flusher and DR007 could fix frequently below OMO rate.

    INR Rates - Concerns of tight liquidity are easing. RBI has switched to conducting 14D VRR auction to provide short-term liquidity; INR0.47tn was taken up on Friday against notified amount of INR0.50tn. Also, the RBI Board approved surplus transfer of INR0.87tn to Central Government for FY22/23, more than the budgeted INR0.48tn. Finally, the RBI announced the withdrawal of 2000 rupee banknotes from circulation. Members of the public may deposit banknotes into their bank accounts (adds to liquidity) or exchange them into banknotes of other denominations (doesn't add to liquidity). As of 31 March, the total value of 2000 rupee banknotes amounted to INR3.62tn. Our estimation sees the surplus transfer and deposit of 2000 rupee banknotes could add around INR2.50tn to banking liquidity, which is supportive of the bull-steepening we are seeing in domestic rates curves. From here, we expect RBI could subsequently switch back to conducting VRRR auctions to absorb some of the added liquidity and result in O/N call money rate averaging slightly above (5-10bps) the policy repo rate.


    Duncan Tan

    Rates Strategist - Asia

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company 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. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, 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 Company 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 Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.