Debt Perspective Jan January ry 20 2018 18
Debt Markets - Revie iew
Bond Market Overview • The 10-year bond yield increased above 7% levels and ended the month at 7.05%, 18 bps higher than the previous month (6.87%). • The yields rose on back of growing concerns that increase in global crude oil prices may result in an increase in domestic inflationary pressures. • While, some support was witnessed after Moody – the global rating agency upgraded India’s sovereign credit rating. • On the data front, Inflation based on the Wholesale Price Index (WPI) accelerated to an eight-month high of 3.93% in November, from 3.59% in October. WPI-based inflation rose due to a sharp rise in onion prices and costlier seasonal vegetables. Onion witnessed a whopping 178.19% rise in inflation last month on annual basis. For seasonal vegetables too, the rate of price rise accelerated to 59.80%, against 36.61% in October. • India's consumer price index (CPI) or retail inflation breached the central bank’s limit and shot up to a 15-month high of 4.88% in November, against 3.58% a month earlier. Combined food price inflation continued to witness a jump, with prices rising 1.58% in November from a 1.90 percent rise in October. • Industrial activity in the country, as measured by the Index of Industrial Production, rose 2.2% in October, compared with 3.8% the previous month. On a cumulative basis, the IIP grew by just 2.5% between April and October this year, against 5.5% in the same period a year ago. • India’s fiscal deficit for the period from Apr to Oct widened to 96.1% of the budget estimate of FY18 from 79.3% in the same period of the previous fiscal, which has increased concerns of a fiscal slippage in this fiscal.
Debt Roundup Dec’17 Nov’17 Change Call Rates/Interest Rates Call Rates 6.20% 5.80% 40bps Repo rate 6.00% 6.00% 0bps Statutory Liquidity Ratio (SLR) 19.50% 19.50% 0bps CD Rates 3 month 6.35% 6.20% 15bps 6 month 6.90% 6.51% 39bps 1 Year 7.05% 6.70% 35bps CP Rates 3 month 6.90% 6.85% 5bps 6 month 7.50% 7.25% 25bps 1 Year 7.70% 7.35% 35bps T-Bill/G-sec 91 Days 6.20% 6.12% 9bps 364 Days 6.39% 6.27% 12bps 6.79% GOI 2027 7.37% 7.05% 32bps Corporate Bonds (PSU) 1 Year 7.35% 6.90% 45bps 3 Year 7.60% 7.22% 38bps 5 Year 7.76% 7.45% 31bps 10 Year 7.85% 7.68% 17bps International Markets 10 Year US Treasury 2.41% 2.38% 3bps 3 Months LIBOR 1.69% 1.48% 21bps 12 Months LIBOR 2.11% 1.94% 17bps Brent Crude ($) 66.63 63.46 3.17 Gold ($) 1296.18 1283.75 12.43
Yield Curve- Movement Analysis 7.70 31/12/2017 30/11/2017 7.50 7.30 7.10 6.90 6.70 6.50 6.30 6.10 3 months 6 months 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 10 year 11 year • The yields rose after domestic inflationary pressures grew in Nov 2017. Increase in global crude oil prices and concerns of fiscal slippage further weakened appetite for debt. • However, further losses were restricted after the U.S. Federal Reserve forecasted only three rate hikes in 2018. • The 10-year bond yield ended the month at 7.37%, 32 bps higher than the previous month (7.05%).
In India ian Economy - Revie iew
November IIP growth rises to 17-month high of 8.4%, retail inflation surges to 5.21% in December Who Wholesale pr price ce inf nflation slows to o 3.58% in n De Dece cember; ; CPI Inf nflati tion spu purts to o 17-month hig high of of 5.21% in n De Dece cember 2017 WPI CPI 8% 6.6% 7% 5.7% 5.3% 6% 4.9% 5% 5.2% 3.9% 3.9% 3.7% 3.6% 3.9% 3.6% 3.4% 3.3% 4% 3.2% 3.2% 3.6% 3.0% 3.4% 3.4% 2.6% 2.4% 2.3% 3% 1.9% 1.5% 2% 0.9% 1% 0% Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Ind ndustrial outp output zooms 8.4% in n November; ; Ind ndia's man manufactu turing outp output t ri rises in n De Dece cember to o 54.7 12% 10.3% IIP PMI 8.40% 7.30% 3.98% 7% 4.00% 4.70% 5.70% 4.50% 3.75% 3.80% 1.02% 3.30% 2.20% 1.76% 3.10% 0.57% 2% 1.70% -0.8% 1.12% 0.70% 0.6% 0.2% -0.10% -0.10% -0.70% -1.20% -1.2% -1.4% -1.7% -1.90% -3% -2.7% -7.4% -8% -13% Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
RBI Keeps Repo Rate on Hold at 6%, Inflation Forecast Increased CRR % Repo % Rev Repo % SLR %(RHS) 8.5 23.0 7.5 22.0 6.5 21.0 5.5 20.0 4.5 19.0 3.5 18.0 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jun-16 Oct-16 Feb-17 Jun-17 Sep-17 Jan-18 • The six-member Monetary Policy Committee (MPC) of Reserve Bank of India, headed by Governor Urjit Patel; as widely expected kept repo rate unchanged at 6.0% in its fifth bimonthly monetary policy meeting of FY18. Consequently, MSF (Marginal Standing Facility Rate) and Bank rate remained unchanged at 6.25% each. • The RBI revised its inflation projections for Q3 & Q4 marginally upwards by 10bps from 4.2%-4.6% in October policy to 4.3%-4.7% in the December policy. While, The RBI retained its Gross Value Added (GVA) growth projection for FY18 (year-ending March 2018) at 6.7%, with balanced risks. • The RBI said that the implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several items may result in fiscal slippage with attendant implications for inflation. • The RBI’s policy stance was in line with expectations, maintaining a word of caution on the upside risks emanating from high commodity prices, global financial instability, HRA related increases, rising input costs and fiscal slippage.
Glo lobal & Currency Markets - Revie iew
Indian Bond yields moved up significantly Dollar index movement in the past 1 since July17 month DXY Index Germany - 10 Year US - 10 Year India - 10 Year (RHS) 94.5 3.0 9.0 94.0 2.5 8.0 93.5 2.0 93.0 7.0 1.5 92.5 1.0 6.0 92.0 0.5 91.5 5.0 01-Dec-17 04-Dec-17 07-Dec-17 10-Dec-17 13-Dec-17 16-Dec-17 19-Dec-17 22-Dec-17 25-Dec-17 28-Dec-17 31-Dec-17 0.0 Dec15 Apr16 Aug16 Dec16 Apr17 Aug17 Dec17 -0.5 4.0 • The 10 year US-India bond yield spread continue to rise since August 2017; the spread increased from 442 bps in August to 496 bps in December; which is almost 5%. • The 10 Year US-Germany spread have started to increase since August, due to stronger Eurozone data amid increasing political stability. The difference in the spread is close to 200bps.
Emerging markets bond yields 10 Year Gsec Yield 2015 end 2016 end 2017 end Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 3m change in (% mth end) bps Brazil 16.5 11.4 10.2 10.0 10.0 9.7 9.9 10.4 10.2 47 • Indonesia and Taiwan China 2.8 3.0 3.9 3.6 3.7 3.6 3.9 3.9 3.9 29 saw the sharpest fall India 7.8 6.4 7.1 6.5 6.5 6.7 6.9 7.1 7.1 38 in bond yields in last Indonesia 8.7 7.9 6.3 6.9 6.7 6.5 6.8 6.5 6.3 -19 three months Korea 2.1 2.1 2.5 2.2 2.3 2.4 2.6 2.5 2.5 10 • While, Philippines, Malaysia 4.2 4.2 3.9 4.0 3.9 3.9 4.0 3.9 3.9 -1 Brazil and India saw Philippines 3.9 4.6 5.7 4.7 4.7 4.6 4.8 5.7 5.7 109 the highest rise in Russia 9.6 8.4 7.6 7.8 7.7 7.6 7.6 7.6 7.6 2 bond yields in last three months South Africa 9.8 8.9 8.6 8.6 8.6 8.6 9.1 9.3 8.6 4 Taiwan 1.0 1.2 0.9 1.0 1.0 1.0 1.0 1.0 0.9 -9 Thailand 2.5 2.6 2.4 2.5 2.4 2.3 2.4 2.4 2.4 4
Debt Markets - Outlook
Key Variables - Outlook & Impact on Benchmark Rates Key Variables Short Term Long Term Inflation Rupee Credit Demand RBI Policy Global Event Risk Liquidity
Outlook & Investment strategy • Indian Bond markets (10-year G sec) continued to witness rise in yields as market participants kept on worrying about fiscal slippage and increase in global crude oil prices. These have fueled concerns of increase in domestic inflationary pressures, which has lowered the prospects of a rate cut by the RBI in the near term. • Growth continues to normalize supported by ongoing remonetisation, resolution of GST-related issues and PSU bank recapitalization. • Low GST collection and rate revision, rising crude oil prices, and a slew of government measures aimed at stimulating growth need to be monitored closely for any potential fiscal slippages. • Going forward, the likely firming up of inflation in the near term, uncertainty associated with GST collections, next year's fiscal deficit target as well as the rise in crude oil prices, will keep RBI on pause mode for the remaining part of this fiscal year. • Going ahead, we continue to maintain our exposure in credit funds and selective exposure in dynamic bond funds only for aggressive investors.
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