>Interest Rates (MERRILL LYNCH)

Interest rates: Roadmap through the storm

Deposit/lending rates to soften, yields to bottom by June:
We try to time macro catalysts for rate movements through the down cycle ahead.
The first of our six phases – falling yields, high deposit/lending rates – is obviously
over. We are, in our view, in the second phase in which weakening credit offtake
is pulling down lending rates. We expect June to usher in the third phase as yields
bottom, with a high fiscal deficit dampening support from RBI easing/deflation.

Gilts: Bullish near-term on RBI cuts, fiscal risks looming:
Ashish Agrawal, our Asia rates strategist, find bonds caught between RBI easing
and rising issuance. The OIS curve is trading below the government bond curve
expecting easy liquidity/ rate cuts. The latter is steepening over rising issuance.

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