Investors Raised Hopes Of Easing Liquidity Conditions Amidst Stimulus Measures In China

Given the increasing pressure on liquidity, RBI may resort to measures to infuse durable liquidity in the system

Aditi Gupta, 

Economist,

Bank of Baroda

Mumbai, January 25, 2024:Flash PMIs of major economies signalled an improvement in economic activity. In US and UK, flash composite PMI rose to a 7-month high, led by an improvement in both services and manufacturing activity. However, in the Eurozone the pickup in activity was driven solely by the manufacturing sector, as services activity weakened. Separately, PBOC cut the reserve requirement ratio by 50bps to 10%, effectively injecting US$ 140bn liquidity in the banking system. The move is expected to provide much needed support to the economy and pave way for further policy measures. In India, both manufacturing and services PMI showed a strong improvement in Jan’24. Domestic liquidity conditions continue to remain tight with liquidity deficit at a record high of Rs 3.5 lakh crores. Given the increasing pressure on liquidity, RBI may resort to measures to infuse durable liquidity in the system.

•  Except Dow Jones and Nikkei, global markets closed higher. Investors raised hopes of an easing liquidity conditions amidst stimulus measures in China. Hang Seng rose the most, followed by Shanghai Comp. Sensex rose by 1%, led by metal and oil and gas stocks. It is trading lower today, while Asian stocks are trading mixed
•  Global currencies broadly gained against the dollar. DXY fell by 0.4% as investors await US GDP report. Prospects of an end to BoJ’s ultra-dovish policy pushed JPY 0.6% higher. GBP and EUR also gained amidst Improvement in flash composite PMIs in UK and Eurozone. INR is trading further stronger today, in line with other Asian currencies.
•  Except Germany (tad lower) and China (stable), global yields closed higher. US 10Y yield rose by 5bps as PMI data improved, which again raised doubts about timing of rate cut by Fed. Even Japan’s 10Y yield rose by 5bps as some pivot in policy is anticipated. India’s 10Y yield rose a tad and is trading at 7.19% today.

(The views expressed in this research note are personal views of the author(s) and do not necessarily reflect the views of Bank of Baroda. Nothing contained in this publication shall constitute or be deemed to constitute an offer to sell/ purchase or as an invitation or solicitation to do so for any securities of any entity.)