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Informist, Wednesday, Aug 14, 2024

 

MUMBAI – Nomura today retained its high conviction call to receive fixed rates in the two-year non-deliverable overnight indexed swap rate, targeting a fall to 6.00% by end-September. Currently, the non-deliverable 2-year OIS rate is 6.20%. 

 

"We still prefer the NDOIS (non-deliverable OIS) curve at this juncture given its higher-beta nature and the prospects for more easing to be priced in," Emerging Markets – Asia Rates Strategist Nathan Sribalasundaram said in a note. The overnight Mumbai Interbank Offer Rate--the floating leg of the OIS contract--is likely to be fixed at 6.55-6.60% over the next couple of months, the note said. 

 

Sribalasundaram also recommended the seven-year government bond, targeting a fall in the yield to 6.75% by the quarter-end from 6.85% currently. The calls were based on the view that surplus liquidity in the banking system will sustain until the end of September. On Tuesday, the Reserve Bank of India data showed the banking system liquidity surplus was 1.26 trln rupees, and the surplus had hit a two-year high of 2.8 trln rupees in July.

 

"Beyond September, there is some risk that MIBOR could rise again if liquidity returned toward neutral. However, this could change should RBI start easing rates in October," Nomura said.

 

Until September, factors like the RBI's intervention in the foreign exchange market, a return of currency in circulation to the banking system, and government spending would ensure the liquidity surplus persists. The government's cash fluctuations will be the main driver of interbank liquidity, though the balance is likely to remain near 2 trln rupees until December-end. Month-end spending, which routinely occurs for scheme payouts, salary and pension payments, has been higher recently, Nomura said.

 

Even during India's inclusion on global bond indices that started on Jun 28, foreign portfolio investors have slowed their purchases of government bonds recently, Sribalasundaram said. Until Tuesday, foreigners had bought only 66.64 bln rupees, or less than $800 mln, of bonds under the fully accessible route in August. These bonds are being included in indices operated by JP Morgan and Bloomberg starting in 2024-25 (Apr-Mar).

 

Meanwhile, FPIs have turned net sellers of Indian equities, leading to outflows of about $2 bln in August. An increase in currency in circulation in Oct-Dec will further draw out liquidity, Nomura said.

 

"In our base case, we could see interbank liquidity shifting from a surplus back toward neutral over the coming months unless FX inflows materially pick up," the note said. "Should the weakness in global risk sentiment resume, we could see more material equity outflows."

 

Nomura expects India's government borrowing calendar for Oct-Mar to average weekly gilt auctions of 320 bln rupees. Before that, the RBI's open market bond sales in the secondary market are unlikely to continue if the liquidity does turn closer to neutral, the note said. The central bank has sold 116.75 bln rupees since Jul 8, likely as a measure to drain liquidity from the banking system. Meanwhile, the RBI's variable rate reverse repo operations are likely to continue in a bid to keep overnight rates above the policy repo rate of 6.50%.

 

"We continue to believe this is effective in moving some of the liquidity into longer tenors, but not in meaningfully affecting call rates," Nomura said. "RBI has been conducting more variable rate reverse repos when call rates dip below 6.5%, so we believe there is somewhat a floor around there given the VRRR cut-off is 6.49%."  End

 

US$1 = 83.96 rupees

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

 

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