Published on 8/01/2018 5:06:11 PM | Source: Kotak Securities Ltd

System liquidity to tighten marginally this week - Kotak Sec

Posted in Special Event Reports| #Kotak Securities Ltd #Special Report

* System liquidity to tighten marginally this week.

The liquidity conditions improved sharply last week, with the surplus rising to a three week high of Rs 1.05tn probably aided by month-end heavier than usual government spending, RBI taking delivery of its long forward position (~$2.3bn) and RBI mopping up big ticket flows in the spot market. The surplus for week ending January 6 averaged Rs 858 bn as against a deficit of Rs 317tn for the week ending December 30. Overnight rates, accordingly, have eased, with the weighted average overnight rates for the week inching lower by 15bp to 5.82%. Going ahead, we expect liquidity conditions to tighten marginally from the peak seen last week amidst outflows related to heavy auction and non-GST related tax collections.

* Government’s cash balances remain positive.

Government’s cash balance which had shot up to ~Rs 1.3 tn as on Dec 29 are expected to fall to ~Rs 650-750bn this week as the heavy government spending last week will in part get offset by the non-GST tax collections and auction inflows amid limited spending.

* Currency in circulation increases.

CIC for the week ending December 29 fell marginally by Rs 41 bn to Rs 16.93 tn. The CIC forms around 11.35% of FY2017 GDP. Prior to demonetization, this number was around 12.1%.

* Bonds finding some respite.

The bond market continues to witness swings, however ended the past week with some relief. Last week saw a sluggish start and saw announcement of the new 10-yr paper in the weekly auction. The yields peaked in early part of the week owing to surging crude prices. The latter part of the week saw some easing in yields, further helped by news that RBI will likely increase the dividend transfer to the government by ~130bn to help plug the fiscal gap. The new 10-yr paper auction met with decent demand, with the cut-off coming in at 7.17%. This week has started sideways, with market reacting lukewarmly to the lower-than-expected advance GDP print for FY18 by CSO. The week is light on data and events, and market will focus on the inflation print on 12th Jan, post market hours. We expect the new 10-yr paper to trade in the range of 7.07-7.16% , and the old benchmark 10-yr paper ~ 7.27-7.37% during the week.

* Advance growth estimates underplay the cyclical recovery.

As per the CSO’s advance estimates, real GDP growth moderated sharply to 6.5% in FY18 from 7.1% in FY17. Real GVA growth for FY18 is estimated at 6.1% (6.6% in FY17). The estimates indicate moderation in growth of agriculture and allied activities to 2.1% from 4.9% in FY2017. Industrial sector growth is also estimated to slow down to 4.4% in FY18 from 5.6% in FY17 on the back of manufacturing growth of 4.6% against 7.9% in FY17. Services sector growth is estimated at 8.3% compared to 7.7% in FY17. The CSO added that their estimates are based on extrapolation and are a tad conservative. With 1HFY18 GVA growth at 5.8%, the CSO’s implied 2HFY18 growth is around 6.4%. We continue to expect 2HFY18 GVA growth at 7.1% compared to 5.8% in 1HFY18, backed by strong rebound in recent activity indicators and possible Improvement in corporate earnings. For FY18, we retain our GVA estimate at 6.5%, and expect the economy to further recover, although gradually, to 7.1% in FY19 as GST related disruptions smoothen and as consumption improves amid rising rural wages, lower GST tax incidence and expected payouts from State’s implementation of 7CPC.

* Corporate bonds yields fell by end of the week.

Market sentiment ended better last week after new 10 year GOI cut off came at 7.17% and closed at 7.09%. Corporate bond yields went up initially in line with Gsec market but ended on a higher note, following Gsec suit. On the supply front, we saw a sluggish week with only few issuances. We saw issuances worth Rs ~1700 Cr of Jammu & Kashmir Bank (Rs. 500 Crs), Adani Power (Rs 490 Crs), Cholamandalam Investment and Finance (Rs. 230 Cr) and India First Life Insurance (Rs 100 Cr).

* Pipeline for next week.

We can expect issuance from Shree Cements and DCB in the coming week(s).

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