Money Market View - Liquidity surplus to improve towards the close of this week - Kotak

- Liquidity surplus to improve this week. The banking system liquidity surplus tightened to average ~Rs 2.75 tn for the week ending Jun 23 as against Rs 2.95 tn for the week ending Jun 17. However, the average overnight funding rates for the past week remained flat at around 6.17%. We expect liquidity surplus to remain range bound in the early part of the week given the Gsec and SDL auctions. However, towards the close of the week we expect the liquidity surplus to improve on the back of month-end government spending. Next week will witness the launch of GST and the implementation of the same may cause some transient disruption in tax collections and government spending pattern. The system liquidity conditions could then witness some volatility for a brief period.

- Government's cash balances turn marginally positive. After dipping continuously into WMA for the past 8 weeks, the government has expectedly repaid to the RBI the outstanding amount of Rs 247 bn. As on Jun 16, the WMA balance is nil given the inflows arising from the advance tax collections. Our estimates indicate that the Government's cash balances may be marginally positive at ~Rs 150-250bn currently. In the absence of additional inflows and given the month-end government spending requirement, we may see the government again dip into WMA by the end of this week.

- Pace of currency in circulation pace remains controlled. CIC for the week ending Jun 16 increased by Rs 107bn to Rs 15.29tn. The weekly pace has moderated after having witnessed a sharp increase of Rs 230 bn for the week ending Jun 9 - the highest increase in the past 5 weeks . CIC now roughly forms around 10.25% of nominal GDP compared to ~12% prior to demonetization.

- Bonds trade range bound. The market opened marginally positive last week as investor's awaited minutes from the June MPC meeting to gain further insight into the future interest rate trajectory. Higher US treasury yields in the beginning of the week weighed on the bonds initially; but just ahead of the release of the MPC minutes, likely position building aided sentiments. This pushed the yields ~6bps lower compared to previous Friday's closing. However, markets squared off part of the gains as the MPC minutes were mostly inline with expectations reconfirming the mildly dovish bias. The domestic 10-yr Gsec bond yield closed the week lower by ~3ps WoW. Meanwhile, US 10-year yield also inched lower by 2bps WoW as US activity data continues to disappoint. Given that the week is light on data and events, we expect the 10-yr benchmark paper to trade in a range of 6.40-6.50% during the week.

- Corporate Bonds continue to witness consolidation. Primary market volumes for the last week stood at appox. Rs. 8000 Cr. Corporates and banks borrowed across tenors with Axis bank (Rs 2500Cr), ICICI bank (Rs 2000 Cr) and HDFC Ltd (Rs 775 Cr) being the large borrowings. Bond yields were up 2-3 bps over the week. Traders continued to be on the sidelines without building any fresh positions with markets in consolidation mode. 3-yr REC was trading at 7.10% levels, up almost 3 bps over last week. In the shorter end, 3m bank CDs were trading in the 6.30-35% range and 6m closer to 6.50%. We can expect issuances from NTPC-SAIL power Co Ltd this week.

- Dovish tilt in MPC minutes but most members preferred to wait and watch. The minutes of the June policy meeting were overall mildly dovish with almost all members acknowledging the recent fall in inflation and its core components and fading immediate upside risks. However, MPC members (except Dr Dholakia) seemed concerned on inflation risks owing to farm loan waiver-led fiscal slippages. The two significantly contrasting inflation views were evident in the June minutes as well. Dr Patra argued that in a forward looking inflation targeting regime, amid limited clarity on decoupled impact of transitory and structural factors on inflation deceleration, hasty policy cuts can be costly in the medium term. On the other hand, Dr Dholakia suggested that amid the present benign conditions, the costs of waiting for further opportune moment for accommodation could be severe. He strongly argued for at least 50 bps of repo rate cut. We expect 25bps of rate cut in August.

- Kharif sowing progresses. As of June 23, the total Kharif acreage is 9.6% yoy, with the rice sowing 4.6% yoy higher at 1.7 mn hectares and oilseed acreage higher by 11.1%yoy at 1.1 mn hectares. However, the acreage under pulses at 0.6 mn hectares is 33.7% lower than last year's. Coarse cereals' acreage is 11.1% higher at 1.8 mn hectares. Sugarcane and cotton acreages are at 4.8 mn hectares (4.5 mn hectares last year) and 2.5 mn hectares (1.9 mn hectares last year) respectively.

Source : Equity Bulls

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