Debt Perspective Mar arch 20 2018 18
Debt Markets - Revie iew
Bond Market Overview • The 10-year bond yield ended the month at 7.68%, 28 bps higher than the previous month (7.40%). • Bond yields rose to the highest since February 2016 after the minutes of the central bank’s policy meeting showed that a majority of the members of the monetary policy panel turned hawkish at the February policy meet, even as they kept rates on hold. • Rise in global crude oil prices also weighed on the bond market. Moreover, rise in yields was due to rise in 10- year U.S. treasury yields, volatility in oil prices and following comments from Federal Reserve Chairman Jerome Powell that raised concerns of faster-than-expected hikes in U.S. interest rates. • India’s Wholesale Price Index-based inflation (WPI) slowed to a seven-month low of 2.48% in Feb 2018 from 2.84% in the previous month and 5.51%in the same month of the previous year. Wholesale inflation grew at a slower pace due to softer rise in food and fuel prices. The WPI Food Index also decreased from 1.65% in Jan2018 to 0.07% in Feb 2018. • On the other hand, the Consumer Price Index (CPI) based inflation or retail inflation grew 4.44% in Feb 2018,down from 5.07% in the previous month and up from 3.65% in the same month of the previous year. Though retail inflation growth subdued, it surpassed Reserve Bank of India’s medium-term target of 4% for the fourth consecutive month. The Consumer Food Price Index also grew 3.26% in Feb 2018, down from 4.70% in the previous month and up from 2.01% in the same month of the previous year • India’s Index of Industrial Production (IIP) grew 7.5% in Jan 2018 as against growth of7.1% in Dec 2017 and 3.5% in the same period of the previous year. The manufacturing sector also surged 8.7% in Jan 2018 from 2.5% growth in the same period of the previous year. However, IIP growth for Apr to Jan 2018 slowed to 4.1% from 5.0% in the same period of the previous fiscal.
Debt Roundup Feb’18 Jan’18 Change Call Rates/Interest Rates Call Rates 6.05% 6.00% 5bps Repo rate 6.00% 6.00% 0bps Statutory Liquidity Ratio (SLR) 19.50% 19.50% 0bps CD Rates 3 month 7.30% 7.30% 0bps 6 month 7.55% 7.35% 20bps 1 Year 7.59% 7.55% 4bps CP Rates 3 month 7.90% 7.92% 2bps 6 month 8.05% 8.10% 5bps 1 Year 8.15% 8.10% 5bps T-Bill/G-sec 91 Days 6.27% 6.40% 13bps 364 Days 6.65% 6.54% 11bps 6.79% GOI 2027 7.86% 7.57% 29bps Corporate Bonds (PSU) 1 Year 7.70% 7.57% 13bps 3 Year 7.83% 7.70% 13bps 5 Year 8.07% 7.80% 27bps 10 Year 8.40% 7.98% 42bps International Markets 10 Year US Treasury 2.86% 2.71% 16bps 3 Months LIBOR 1.98% 1.77% 21bps 12 Months LIBOR 2.47% 2.26% 21bps Brent Crude ($) 66.23 68.46 2.23 Gold ($) 1317.79 1342.07 24.28
Yield Curve- Movement Analysis 8.10 28/02/2018 31/01/2018 7.90 7.70 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 • Bond yields rose to the highest since February 2016 after the minutes of the central bank’s policy meeting showed that a majority of the members of the monetary policy panel turned hawkish at the February policy meet, even as they kept rates on hold. • Rise in global crude oil prices also weighed on the bond market. Moreover, rise in yields was due to rise in 10- year U.S. treasury yields, volatility in oil prices and following comments from Federal Reserve Chairman Jerome Powell that raised concerns of faster-than-expected hikes in U.S. interest rates. • The 10-year bond yield ended the month at 7.68%, 28 bps higher than the previous month (7.40%).
In India ian Economy - Revie iew
Feb retail inflation eases to 4-month low of 4.44%, IIP grows 7.5% in Jan Who Wholesale inf nflation eases to o 7-month low of of 2. 2.48% in n February; ; Re Retail inf nflation at 4-mth low of of 4. 4.44% on on che heaper foo ood, fue uel WPI CPI 8% 6.6% 5.7% 5.2% 6% 5.1% 4.9% 3.9% 3.4% 3.9% 3.9% 3.7% 3.6% 3.6% 3.3% 4.4% 3.2% 4% 3.6% 3.0% 2.2% 2.6% 2.8% 2.5% 2.3% 1.9% 1.5% 2% 0.9% 0% Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 IIP P ri rises to o 7.5% in n Ja Janu nuary, Nikkei Ind ndia man manufacturing PM PMI falls to o 52.4 in n Ja Janu nuary 12% IIP PMI 10.30% 10% 8.40% 8% 7.50% 7.30% 7.10% 4.00% 6% 5.70% 4.70% 4.50% 4% 4.00% 3.98% 3.75% 3.80% 3.30% 3.10% 2.20% 2% 1.70% 1.02% 0.90% 0.60% 0.2% 0% -0.10% -0.10% -0.8% -1.20% -1.20% -1.4% -1.70% -2% -1.90% -2.70% -4% -6% -7.4% -7.50% -8% 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 Jan-18
RBI Leaves Interest Rate Unchanged, Raises Inflation Forecast 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 May-15 Aug-15 Dec-15 Apr-16 Aug-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-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 per cent in its sixth bimonthly monetary policy meeting of FY18; citied concerns about the inflationary push by rising global crude oil prices. Consequently, MSF (Marginal Standing Facility Rate) and Bank rate remained unchanged at 6.25% each. Five on the six-member monetary policy committee voted for the decision, with one seeking a hike. • The RBI raised its March quarter CPI inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year. • However, RBI posits a revival in growth — projecting an acceleration in economic growth to 7.2% from a level of 6.6% in the current fiscal year. It premises this on a host of factors including revival in investment demand and strengthening exports. • Thus, in this policy while striking the balance between inflation and growth, RBI has given priority to growth at this juncture, which will now calm sentiments of an otherwise nervous markets.
Glo lobal & Currency Markets - Revie iew
Indian Bond yields moved up above 7% Dollar index movement in the past 1 since Nov17 month Germany - 10 Year US - 10 Year India - 10 Year (RHS) DXY Index 91.0 3.5 9.0 3.0 90.5 8.0 2.5 90.0 2.0 7.0 89.5 1.5 89.0 6.0 1.0 88.5 0.5 5.0 88.0 0.0 01-Feb-18 04-Feb-18 07-Feb-18 10-Feb-18 13-Feb-18 16-Feb-18 19-Feb-18 22-Feb-18 25-Feb-18 28-Feb-18 Feb16 Jun16 Oct16 Feb17 Jun17 Oct17 Feb18 -0.5 4.0 • The 10 year US-India bond yield spread has now been reducing since Dec 2017; the spread has reduced from 496 bps in Dec 2017 to 482 bps in Feb 2018. • 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 220bps.
Emerging markets bond yields 10 Year Gsec Yield Jan-18 Feb-18 3m change in 2015 end 2016 end 2017 end Sep-17 Oct-17 Nov-17 Dec-17 (% mth end) bps Brazil 16.5 11.4 10.2 9.7 9.9 10.4 10.2 9.7 9.6 -77 • South Africa, Brazil China 2.8 3.0 3.9 3.6 3.9 3.9 3.9 3.9 3.9 -6 and Russia saw the India 7.8 6.4 7.1 6.7 6.9 7.1 7.1 7.6 7.9 81 sharpest fall in bond Indonesia 8.7 7.9 6.3 6.5 6.8 6.5 6.3 6.3 6.6 8 yields in last three Korea 2.1 2.1 2.5 2.4 2.6 2.5 2.5 2.8 2.7 26 months Malaysia 4.2 4.2 3.9 3.9 4.0 3.9 3.9 3.9 4.0 12 • While, Philippines Philippines 3.9 4.6 5.7 4.6 4.8 5.7 5.7 6.2 6.7 103 and India saw the Russia 9.6 8.4 7.6 7.6 7.6 7.6 7.6 7.2 7.0 -58 highest rise in bond yields in last three South Africa 9.8 8.9 8.6 8.6 9.1 9.3 8.6 8.5 8.1 -121 months Taiwan 1.0 1.2 0.9 1.0 1.0 1.0 0.9 1.0 1.0 4 Thailand 2.5 2.6 2.4 2.3 2.4 2.4 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 due to rise in 10- year U.S. treasury yields, volatility in oil prices and minutes of the February RBI policy review indicating a gradual hardening of views around inflation risks. • The imposition of LTCG tax on equities and increased income tax exemption for senior citizens may attract more funds in the fixed income space. • Going ahead, we expect bond yields to be volatile in the short term given the uncertainty on future inflation reading, crude prices, fiscal deficit target for next year, MSP policy adopted by government in 2018 and its resultant impact on food inflation amid global bond yields movement. • Also, investment by FIIs and DIIs and the movement of rupee against the dollar will be closely tracked by bond markets. • Accordingly, we continue to stay put in credit opportunities funds and also suggest to look at investment in short term bond funds with low duration and having high credit quality papers.
Thank You Email il: in investmentadvis isory@tatacapital.com
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