PBOC and RBI target lower borrowing costs


PBOC’s rate cut is likely to be matched by a similar reduction in the loan prime rate this Thursday. First tranche of RBI’s long-term repo operations attracted strong interest yesterday.
Nathan Chow, Radhika Rao18 Feb 2020
    Photo credit: AFP Photo


    China: MLF rate reduction paves the way for a LPR cut

    The People's Bank of China added RMB100bn of funds into the market via 7-day reverse repos and offered RMB200bn of 1-year medium-term loans on Monday.The rate was lowered by 10bps to 3.15%, the lowest since 2017. The reduction came after the central bank’s cutting of rates on its short-term reverse repo operations by the same magnitude just two weeks ago. Yesterday’s operation provided longer-term funding to the banking sector, in addition to the RMB800bn injection through a 50bp cut in the required reserve ratio in early January.

    Monday’s injection fell short of the RMB1tn that was drained from markets as previously issued reverse repos matured. Government bonds reversed gains after the operation, with yield on ten-year sovereign bond up 3bps to 2.893%. Higher yields will attract buyers, in our view. We continue to expect the 10-year yields to be biased for further downside amid PBOC’s accommodative stance. Since late January, the authorities has stepped up efforts from cutting rates to buying extra securities to cushion the economy from the virus epidemic. This marks a shift in gears from its previous focus on reining in debt to promoting growth. Monday’s rate cut is likely to be matched by a similar reduction in the loan prime rate this Thursday, which is the basis for pricing corporate and household loans.

    India rates: Strong uptake of RBI’s LTRO

    First tranche of RBI’s long-term repo operation attracted strong interest yesterday. Bids worth INR1.9trn were received for offer of INR250bn worth 3Y paper, with a bid-cover ratio of ~8x. The next auction will be on Feb 24, worth INR250bn of 1Ys. To recall, the central bank maintained a dovish pause this month, but surprised by allowing banks to lock-in funds at the benchmark rate for one-three year duration (akin to ECB’s LTRO scheme); aimed at lowering funding costs. True to the word, INR denominated bond issuances jumped INR200bn in the past week, according to Bloomberg. Offshore debt issues have also increased to lock-in attractive rates. 
     
    10Y (generic) bond yields slipped below 6.45% to register a low of 6.35%, notwithstanding a firm inflation print this month. RBI’s measures coupled with strong foreign portfolio flows – USD1.9bn MTD – have perked bonds. Short tenor yields also declined on expectations of more steps to calm yields, helped also by absence of fresh GSec issuances for rest of this fiscal year. We see room for the short-end of the curve to fall further (DBS macro investment strategies PDF, HTML) as the central bank focuses on pushing borrowing costs down. Longer-tenor yields also have room to correct further, eyeing 6.3% next.

     

    Nathan Chow

    Strategist/Economist
    nathanchow@dbs.com

     

    Radhika Rao

    Economist – India, Thailand & Eurozone
    radhikarao@dbs.com

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