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Debt Market

Debt Commentary – March  2019

31-Mar-19 28-Feb-19
Change (bps)
10 Year Benchmark Yield (s.a) 7.35% 7.41% -6
10 Year AAA (PSU) (ann) 8.31% 8.63% -32
5 Year AAA (PSU) (ann) 8.16% 8.43% -27
3 Year AAA (PSU) (ann)
8.02% 8.20% -18
1 Year AAA (PSU) (ann)
7.87% 8.03% -16
3 Month T Bill 6.14% 6.40% -26
3 Month CD 7.25%
7.08% 17
6 Month CD 7.33% 7.56% -23
9 Month CD 7.55% 7.60% -5
12 Month CD 7.48% 7.73% -25
10 Year AAA Spread 0.82% 1.08% -26
5 Year AAA Spread 0.67% 0.88% -21


Sovereign bond yields during the month remained volatile and traded with a positive bias on the back of easing global bond yields and increasing expectations of more rate cuts because of lower growth and inflation data points however increased supply in FY20 kept the bond yields from rallying more. US bond yields eased to 2.41 from 2.72 at the beginning of the period. India 10-year G-Sec yields eased and closed the month at 7.45 compared to 7.41 at the beginning of the month. Corporate bond yield rallied a lot more on the expectation of lower supply in Q1 and eased during the month with 10-year and 5-year bond yields ending the period at 8.31 and 8.16 down by 32 bps and 27 bps respectively over previous month close. Money market instruments at the shorter end of the curve remained volatile due to financial year end security supply and systemic liquidity uncertainties and closed the month at lower levels on the back of improved liquidity expectation and rate cut in April monetary policy. 3-month Treasury bill eased by 26 bps to close at 6.14. CDs with residual maturity of 6month to 1 year also rallied due to increased expectations of rate cut and yields dropped by 23 bps and 5 bps respectively. FPI activity saw net inflows of 14,394 crores for the month of March compared to outflow of 9,723 crores for the month of February. Cumulatively, FPI outflows from debt market for FYTD stood at Rs. 47,590 crores. Indian Rupee remained volatile during the month closing at 69.16 before hitting a high of 68.54 compared to 70.75 at the beginning of the period and 65.12 at the beginning of financial year. Crude oil prices increased during the month and closing the month at 68.32 compared to 65.99 at the beginning of the period

On the macroeconomic data released during the period, Retail inflation picked up in February to 2.57%, from record lows seen in January. Core inflation that had turned lower in January at 5.2% picked up to 5.4% in February. Food inflation remains weak at -0.07%, with wider food basket led by vegetables and pulses, still witnessing deflation. Core CPI inflation for February was 5.4% versus 5.2% YoY revised down from 5.4% in January. IIP showed growth of 1.7% YoY in January, down from 2.6% in the previous month and was significantly lower than the 7.4% registered in January 2018. On sequential basis, the headline index inched up by 0.4% MoM, which is weaker than the usual monthly momentum of 0.6% seen in the month of January. At sectoral level, there was a broad-based deceleration across sectors on annualized basis barring primary goods. Capital goods and intermediate goods contracted on both annualized and sequential basis. India’s current account deficit deteriorated to 2.5% of GDP (USD 16.9 bn) in Q3 FY19 from 2.1% of GDP (USD 13.7 bn) in Q3 FY18 but moderated from 2.9% of GDP (USD 19.1 bn) in Q2 FY19.

According to the H1 FY20 G-sec borrowing calendar, the government will borrow INR 4,42,000 crores on a gross basis in H1FY20 – which is 62.3% of the Budgeted borrowing target of INR 7.1 tn. Considering the redemptions, this will amount to INR 3,40,000 crores of borrowing on a net basis in H1 FY20.

RBI’s Monetary Policy Committee reduced the policy repo rate by 25 basis points from 6.25% to 6.00% as per the market consensus while maintaining the stance to “Neutral”. RBI further revised its inflation projections downward to2.4% for Q4-2018-19, 2.9%-3.0% in H1-2019-20 and 3.5%-3.8% in H2-2019-20. GDP growth for 2019-20 is projected to be lower at 7.2 per cent – in the range of 6.8-7.1 per cent in H1:2019-20 and 7.3-7.4 per cent in H2 – with risks evenly balanced. 10-year Gsec benchmark yield hardened post policy announcement as market participants were positioned for a more dovish policy outcome. To facilitate transmission of rate cuts, RBI allowed banks to reckon an additional 2.0 percent of Government securities within the mandatory SLR requirement, as FALLCR for the purpose of computing LCR in a phased manner till April 2020. Overall, the tone of the policy statement was dovish, supporting our view that April rate cut is not the last in the current easing cycle.

Systemic liquidity during the month of March hit a peak negative of 1,10,000 crores and eased to negative 43,400 crores compared to negative 82,900 crores at the beginning of the month. To ease liquidity conditions, RBI conducted OMO purchase of 25,000 crores in the month of March 2019. RBI has conducted OMOs to the tune of Rs. 2,98,500 crores in FY19. Going forward the liquidity is expected to ease with increasing FPI flows, expected government spending kicking in as the new financial year starts.

Going forward, we expect the RBI to deliver another 25bp cut, most likely in August as RBI might want to wait for election outcome, monsoon and final budget. RBI will continue to actively manage liquidity in the banking system using USD swap and OMOs. Lower headline inflation synchronized slowdown in global and domestic growth and dovish developed markets reserve banks has opened up space for monetary easing and we expect 25-50 bps rate cut in FY20. We expect new 10-year Gsec benchmark to trade between 7.25%-7.40% range and 10-year Corporate bonds to trade in a range of 8.15%-8.35%. We expect the short-term rates to remain dependent on systemic liquidity.

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