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CNY Rates - The bulk of liquidity injection (via OMO) to pre-empt year-end liquidity has been withdrawn by last Friday. Market attention will be focused on the CNY700bn of 1Y MLF that is expiring on the 17th and the size of rollover. We expect policymakers to maintain stable and supportive liquidity conditions in 1H, with some prospects of policy rate cuts, so as to strengthen the growth recovery post reopening. Recent surge in infections is clearly posing a near-term drag on economic activity, as seen in PMI and retail sales data. As a result, we think 5Y IRS rates are currently well-priced for this stage of the reopening and the next leg higher in rates would be delayed to 2Q, after China gets through some of the necessary adjustments from unwinding zero-COVID policy. On CGB total returns, we are near-term bullish (in 1Q) but lean bearish further out (in 2H). Besides limited upside potential for CGB yields in 1Q, we expect foreign equity inflows to stay robust and support CGB total returns in 1Q, as offshore sees A-shares are the main channel to play the reopening theme. Net purchases via Northbound Stock Connect have averaged a large CNY8.8bn over the past 3 trading days.
INR Rates - Compared to 4Q of 2022, liquidity conditions appear to have eased off in 2023, as seen by money market rates (overnight call, repo) pushing lower and close to the floor of LAF corridor. Strong tax collections are likely to boost government spending in the last quarter of FY, further improving liquidity conditions and keeping money market rates low within the LAF corridor. GSec's participation of the broad risk rally is expected to stay low, as there are bond supply concerns around the upcoming Budget (1st Feb) and RBI is also likely to use the soft USD backdrop to rebuild fx reserves.
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