Liquidity and Domestic Data in Focus: Retail inflation for June 2016 and the Reserve Bank of India's (RBI) liquidity intervention via open market operations (OMO) will be critical for the bond market. After a sharp rise in the past two months, lower retail inflation would be a positive development for the bond market.
Liquidity in Neutral Mode: The RBI has achieved neutral systemic liquidity position, as stated in the first monetary policy of FY17 in April 2016. The RBI has achieved its desired neutral liquidity in the first quarter itself mainly on account of INR0.8trn OMO purchases in the past three months and a reduction in cash in circulation in June 2016. The net infusion or core systemic liquidity has turned neutral in the last week, from an average 0.8% of net demand of time liabilities in April 2016. The agency believes that there is scope for incremental OMO (purchases) in the remainder of FY17, as the systemic liquidity is an evolving condition rather than a one-time adjustment.
Currency to Consolidate Gains: The agency believes that the rupee is likely to remain stable, supported by restored normalcy in global markets. The implications of an eventual Brexit are likely to be material over both the near and medium terms as the UK and EU iron out exit modalities. In the interim, financial markets, especially currencies are likely to realign and reflect shifts in the global risk appetite.
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