Tata Mutual Fund

Market Commentary

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Debt Market

  • Jan 31, 2013

    Debt Commentary – April 2017

    The month of April saw upward pressure on Government bonds yields. The 10year Government Securities yields moving up from 6.76% to 6.96% levels. However, corporate bonds yields were rangebound due to limited supply and demand from mutual funds. The spread between AAA rated papers and Government Securities compressed from 90 basis points to 66 to 70 basis points. Corporate bonds and state government securities outperformed during the month. Insurance companies and banks were large buyers in state government securities in the primary auction. The long dated papers in primary auction was bid by insurance companies at 5 basis points below the prevailing market levels. One or two bidders cornered the primary auctions of long dated papers.

    RBI in its monetary policy kept the repo rates unchanged but increased the reverse repo rates from 5.75% to 6% levels and decreased the marginal standing facility rate from 6.75% to 6.50% levels. The corridor between borrowing and lending to RBI has now come down to 50 basis points from 100 basis points prevailing before the monetary policy. RBI maintained its monetary policy stance as neutral. However, the minutes of the monetary policy which is published after 15 days had hawkish comments from the Monetary Policy Committee members. Five members had a hawkish view on CPI inflation as they expect CPI inflation to move up in the second half of the Financial year 2017-18. As per RBI representative in the committee, CPI inflation is expected to touch 6 % levels in the second half of the financial year due to first and second effect of increase in housing allowance, consumption boost due to implementation of 7th Pay Commission, re-monetization. As per internal projection of RBI, core inflation which excludes food and fuel items is expected to be consistently above headline CPI inflation reading for the current financial year. If monsoon is not normal due to EL Nino effect which led to warming of Pacific Ocean and lower rainfall in India, food prices could firm up. As per this member, it would be difficult to contain inflation pressure. A member was in favour of rising rates to reduce the need to raise rates aggressively in the future.

    Consumer price inflation came at 3.81 % as per market expectation. The demonetization induced deflation in vegetable prices and food inflation has normalized. Sugar and vegetables has shown an increase of 17.05% and 9.15% and core inflation has come at 4.80%. Pulses inflation has started falling reflected the trend in WPI with a lag. WPI inflation was at 5.70% due to higher prices of fuel and lubricants which increased by 18.16%.

    Liquidity in the system is expected to reduce as RBI has announced Market Stabilization Scheme of INR 1 trillion of T Bills of March maturity. Call money rates/CBLO rates which was trading at 5.80% levels are now trading at 6.10% levels. RBI has also announced cash management bills as the government has resorted to way and means advances due to increased government expenditure.

    US federal reserve kept the Fed Fund rates unchanged. The Federal Open Market Committee (FOMC) indicated it will stick to its path of hiking interest rate twice in the current financial year. FOMC believe slowdown in the first quarter GDP growth of 1% to be transient. FOMC maintained its stance of accommodative monetary policy and its intention of reducing its balance sheet from December 2017 onwards.

    We expect the current 10year bond to trade with a upward bias in the current month as market factor a rate hike in US in the month of June and supply of government and corporate bonds in the Market. There is an expectation of new 10year benchmark government security which should support the benchmark as this paper is expected to come at 10 to 15 basis point lower than the current benchmark paper. Corporate bonds are expected to be offered as many issuers are coming to the market to take advantage of low interest rates prevailing in the market.

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