Demand Boost for Bonds, Global Risks Continue: With a large cash component (INR14.1trn currency consists of INR500 and INR1000 notes at an aggregate level) entering the banking channel, the first impact will be a deposit boost. This durable increase in the deposit base will create more demand for government bonds and other high rated bonds in an environment of tepid credit demand. Additionally, benign retail inflation trajectory will keep aid investors' appetite for bonds. Headwinds to bond market momentum will emerge from a surge in global bond yields - US 30-year and 10-year treasury yields surged over 50bp in less than a month to 2.96% and 2.25% respectively, following the alignment post the US election outcome.
Improvement in Liquidity Conditions: Interbank liquidity will increase as a large amount of cash in circulation moves in to the formal banking channel - translating to almost no scope for open market purchase operations. The sharp improvement in interbank liquidity and deposit will lead to a reduction in certificate of deposits' issuances and a drop in deposit rates.
Rupee Weakening Bias to Intensify: As the dust settles following the US presidential elections and as investors ascertain implications of the outcome, risk aversion sentiment dominates globally. Additionally, the US Fed's stance on rates is in focus, keeping the dollar firm. The rupee has emerged as a low beta asset among the major Asian currencies, exhibiting relative stability. This resilience is likely to continue, keeping it anchored on account of domestic fundamentals. However, vulnerability to global sentiments will keep the currency trading with a depreciation bias in the near term.
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