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Debt Market

Debt Commentary – November 2018

30-Nov-18 31-Oct-18
Change (bps)
10 Year Benchmark Yield (s.a) 7.61% 7.85% -24
10 Year AAA (PSU) (ann) 8.66% 8.75% -9
5 Year AAA (PSU) (ann) 8.64% 8.76% -12
3 Year AAA (PSU) (ann)
8.58% 8.72% -14
1 Year AAA (PSU) (ann)
8.43% 8.56% -13
3 Month T Bill 6.74% 6.93% -19
3 Month CD 7.28%
7.43% -15
6 Month CD 8.13% 8.23% -10
9 Month CD 8.25% 8.40% -15
12 Month CD 8.33% 8.48% -15
10 Year AAA Spread 0.91% 0.75% 16
5 Year AAA Spread 0.89% 0.76% 13


Sovereign bond yields eased during the month on the back of falling crude oil prices, strengthening rupee, OMO purchases and easing global bond yields. US bond yields eased to 2.99 from 3.14 at the beginning of the period after hitting a high of 3.24. India 10-year G-Sec yields eased throughout the month and closed the month at 7.61 compared to 7.85 at the beginning of the month. Corporate bonds also followed suite with both 10-year and 5-year corporate bond yields ending the period at 8.66 and 8.64 down by 9 bps and 12 bps respectively over previous month close. Money market instruments at the shorter end of the curve also eased on the back of improved liquidity conditions due to OMO and fall in Currency in circulation after the festive season. 3-month Treasury bill eased by 19 bps while 3-month CD yields eased by 15 bps and 12-month CD yields eased by 15 bps. FPI activity saw net inflows of 6,884 crores for the month of November compared to an outflow of 9,887 crores in the month of October 2018. Cumulatively, FPI outflows from debt market for FYTD stood at Rs. 53,777 crs. Indian Rupee continued to strengthen on the back of falling crude oil prices and FPI inflows due to improving emerging market sentiments on the back of easing global bond yields, ending the period at 69.58 compared to 73.96 at the beginning of the period and 65.12 at the beginning of financial year. Crude oil prices fell on the back of increasing OPEC supply and continuous increase in US crude inventories closing the month at 58.9 compared to 76.03 at the beginning of the period. 

On the macroeconomic data released during the period, CPI inflation moderated to 3.3% YoY in October from a downward revised 3.7% YoY in September, lower than market expectations. Downward surprise was mainly due to contraction in food inflation by 0.9% YoY from 0.5% growth in September. This was the first contraction in food inflation after 15 months. Core CPI inflation picked up above expectations to 6.1% from 5.8%. September IIP growth slowed to 4.5% YoY from 4.8% in August. Given that the base was slightly favorable this was a somewhat disappointing print. Mining growth remained weak due to strong base even as electricity growth posted another strong number. Manufacturing growth came in at 4.6% YoY. India’s Q3 GDP growth came in at 7.1% YoY moderating from a nine-quarter high of 8.2% in Q2, much below the market expectations. GVA growth moderated even more sharply to 6.9% vs 8% in Q2. While an unfavorable base effect is partly to blame, sequential momentum has also moderated owing to a surprising slowdown in consumption, drag in net exports and on the supply side, led by the industrial sector.

RBI’s Monetary Policy Committee left the policy repo rate unchanged at 6.50% and the policy stance was also unchanged at ‘calibrated tightening’, both in line with market expectations. However, the RBI governor mentioned that if upside inflation risks do not materialize, there is a “possibility of space opening up for commensurate action”. This comment fired up a rally in bond yields. RBI also sharply cut its inflation projection for H2 FY19 by 1.2% to 2.7-3.2% (from 3.9-4.5% earlier), and for H1 FY20 to 3.8-4.2% (versus 4.8% in Q2 2019 previously), with risks tilted to the upside. The RBI kept its GDP growth projection at 7.4% for FY19, and expects 7.5% growth for H1 FY20, though it perceives risks to the downside. RBI also announced SLR cut of 25 bps which will take effect in the quarter commencing January 2019.

Systemic liquidity during the month of November remained negative and closing the period at negative 44,600 crores versus negative 87,300 crores at the beginning of the month. To ease liquidity conditions, RBI conducted OMO purchase of 40k crore in the month of November 2018. In addition, RBI announced additional OMO purchase of 40k crore in the month of December based on its assessment of the durable liquidity needs going forward. RBI has conducted/announced OMOs to the tune of Rs. 1,26,000 crores and has further announced 40,000 crores of OMO taking the cumulative OMO number for FY19 to Rs. 1,66,000 crores.

Going forward, we expect RBI to keep repo rate at status quo in rest of FY2019 and continue to actively manage liquidity in the banking system. We expect 10-year Gsec benchmark to trade with a positive bias as RBI’s commitment to infuse durable liquidity through OMO will keep demand supply dynamics favorable. We expect 10-year G-sec benchmark to trade between 7.25%-7.50% range and 10-year Corporate bonds to trade in a range of 8.40%-8.65%. We expect the short-term rates to remain dependent on RBI actions for liquidity management as the CIC increases going into the industrial busy season as we appear towards financial year end.

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