Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI, bids for MSF (Marginal Standing Facility) and bids for term repo was a negative Rs 810 billion as of 29th November 2013. Liquidity was a negative Rs 870 billion as of 22nd November. System liquidity is in deficit but the factors contributing to deficit liquidity look to be turning positive. Liquidity could ease substantially going forward if factors determining system liquidity stay positive.
Bank deposit growth has picked up with deposits growing at 15.4% year on year as of 15th November 2013. Deposit growth was at around 13.5% levels a few months ago. On absolute basis deposits for the fiscal year 2013-14 has grown by Rs 6300 billion against a growth of Rs 4900 billon seen in the same period last fiscal year.
Credit growth has decelerated from levels of 17% to 15.5% year on year over the last few months. Banks Incremental Credit Deposit Ratio that was running at over 80% levels has come off to 60% levels over the last few months. Broad money supply (M3) growth has gone up from 12.2% levels to 13.8% levels over the last few months.
Liquidity indicators at the monetary aggregate level are definitely showing signs of improvement.
The RBI has received over USD 25 billion in the FCNR B swap window that it opened in September 2013. The window closes on the 30th of November 2013. The inflows into FCNR B deposits have helped increase foreign exchange reserves by USD 12 billion since September 2013. The trade deficit for the April-October 2013 period is down 20% from last year and this is aiding improving prospects for the forecast fall of 35% in current account deficit in this fiscal year.
Capital outflows have eased with FII selling of INR debt down from levels of USD 5.5 billion in June 2013 to levels of USD 0.86 billion in November 2013. Equity flows are positive with FII’s being net buyers of USD 6 billion over the last three months.
RBI has been selectively buying bonds through OMOs and has added Rs 280 billion into the system since August 2013. The government has exhausted all its cash balances of Rs 1000 billion and has been borrowing from the RBI to meet its budget requirements.
Government bond yields fell week on week on the back of the market buying at higher levels of yields. The new ten year benchmark bond the 8.83% 2023 bond saw yields trending down by 4bps week on week while the yield on the 7.28% 2019 bond fell by 12bps. The market will look to steepen the yield curve at any opportunity if it believes that rate hikes are almost done.
Credit spreads as measured by difference between government bond yields and AAA corporate bond yields fell week on week on the back of corporate bond yields falling faster than government bond yields. Benchmark five and ten year AAA credit spreads closed last week at 81bps and 67bps levels down 5bps and 4bps respectively. Credit spreads are likely to stay stable at current levels though five year spreads could trend down further as market buy into the shorter end of the spread curve.
OIS (Overnight Index Swaps) market saw the yield curve shift down week on week with one and five year OIS yields falling by 18bps and 19bps respectively. OIS yields are likely to stay ranged from current levels given expectations of 25bps rate hike by the RBI in its December 2013 policy review.