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Debt Market

  • Jan 31, 2013

    Debt Commentary – January 2017

    31-Jan-17 31-Dec-16 Change (bps)
    10 Year Benchmark Yield (s.a) 6.41% 6.52% -11
    10 Year AAA (PSU) (ann) 7.29% 7.44% -15
    5 Year AAA (PSU) (ann) 7.13% 7.25% -12
    3 Month T Bill 6.20% 6.20% 0
    3 Month CD 6.33% 6.28% 5
    12 Month CD 6.55% 6.63% -8
    10 Year AAA Spread 0.78% 0.81% -4
    5 Year AAA Spread 0.62% 0.62% -1

    Sovereign bond market remained largely range bound throughout the month due to absence of any major event and as market built expectation for upcoming Union Budget. Globally, bond yields remained volatile with US 10 year trading in the range of 2.34-2.51% and closing the period at 2.45%. For the period under review, the 10 year benchmark yield eased by 11 bps to close at 6.41%. The corporate bonds also followed G-Sec, with 10 year AAA yields down by 15 bps, while the 5 year AAA bond yields were down by 12 bps. The yields on the money market instruments at the shorter end remained range bound as RBI managed the excess liquidity in the system by issuing Cash Management Bills (CMBs). While the 3 month Treasury bill rates remained flat, 3 month CD yields hardened by 5 bps and 1 year CD yield eased by 8 bps.

    On the macro economic data released during the period, December CPI printed a series low of 3.40% YoY, from 3.60% YoY in November. CPI inflation fell for the 6th consecutive month driven mainly by fall in food and beverages (Weight: 45.86% in CPI) prices. In sequential terms, CPI fell by 0.61% MoM due to sharp fall in prices of vegetable, fruits and pulses. Outsized decline in perishable items was the key driver, with vegetables declining 11.7% MoM. Sequential decline in protein food, crucially Pulses (-1.7% MoM) also played a role in lowering food inflation. Food and beverages (weight of 45.86% in CPI) grew by 1.98% YoY during the month compared to 2.56% in November. On the other hand, Core inflation was largely flat, even as the more relevant core-core gauge (that filters out the transportation fuels) fell marginally to a new series low of 4.7% from 4.8%.

    December WPI inflation rose 3.39% YoY compared to 3.15% in November, largely in line with expectations. Sequentially, WPI fell 0.16% MoM this month compared to +0.11% last month, led by negative momentum in food prices and slower growth in fuel and manufacturing prices. Food prices fell 1.51% MoM (Previous: -0.91%) in December, amidst favorable impact of good monsoon, efficient supply response and administrative steps taken by the government and likely impact of demonetization-induced cash shortage. Fuel prices slowed to 0.7% MoM (Previous: 1.76%). With the government having passed-through only a fraction of increase in global oil prices, future domestic prices could rise more sharply in the coming months. Momentum in core inflation picked up but remained low at 0.12% MoM (Previous: 0.03%), reflective of economic disruption amid demonetization.

    The Index of Industrial Production expanded by 5.70% YoY in November vs negative 1.9% YoY in October. This was the first IIP release to incorporate for the growth impact of the currency swap confounded market expectations by printing sharply higher. This appears to be anomaly, however. There was sharp buildup in inventories in Passenger cars over the month (adding 0.8% to headline IIP). After a 0.7% MoM average increase in April-Oct, production grew 7.4% MoM in Nov. Production in Commercial vehicles (-19.3% MoM) and Two wheelers (-19.9% MoM) indicate the unsustainability of the production ramp up in Passenger Vehicles segment.

    Going forward, we expect inflation to be around 4.60%-4.70% by March 2017 and RBI target of 5.00% to be comfortably met. Core inflation has worryingly remained sticky around 4.5%-5.0% for past 1 year. However, the upward momentum in core inflation seems to be ebbing. We expect that liquidity will remain easy and RBI may give one final 25 bps rate cut either in February or April monetary policy. We expect 10yr G-sec to remain range bound around 6.30% - 6.50% in the near term.

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