Singapore banking group DBS said it would be paying attention to the Reserve Bank of India’s views on liquidity today and see a 25 bp hike in rates. The bank sees a 25 bp hike accompanied by a neutral stance triggering a small uptick in the 10-year yields followed by consolidation in a 7.65-7.80 per cent range. “We will also be paying attention to the RBI’s views on liquidity today, but we are not holding our breath for an explicit guidance,” said DBS in its daily economic report.
Total system liquidity has been declining for a few months, owing to higher currency in circulation and active central bank intervention in the FX markets, it noted. Banking system liquidity slipped into a deficit of Rs 350 billion this week, with the government building cash balances more recently. This is likely to reverse as dividend payments and end-month government spending kicks in. Since the last RBI hike in June, 10-Year and 2-Year bond yields in India have eased by 10-15 bps, from a consolidation in global yields and a smaller-than-expected jump in India’s June inflation.
Indian 10-Year bond yields have been, after keeping to a narrow 7.75-7.78 per cent range last week, trading with a slightly softer bias towards mid-week, DBS noted. Overall, the bond market is not as convinced as consensus that the RBI will hike today. But it is keeping an open mind for the central bank to shift towards a hawkish stance, DBS said.