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Debt Market

  • Jul 12, 2017

    Debt Commentary – October 2017

    31-Oct-17 30-Sep-17
    Change (bps)
    10 Year Benchmark Yield (s.a) 6.86% 6.66% 20
    10 Year AAA (PSU) (ann) 7.55% 7.44% 11
    5 Year AAA (PSU) (ann) 7.18% 7.19% -1
    3 Month T Bill 6.10% 6.08% 2
    3 Month CD 6.20% 6.15% 5
    12 Month CD 6.58% 6.53% 5
    10 Year AAA Spread 0.57% 0.67% -10
    5 Year AAA Spread 0.20% 0.42% -22

    Sovereign bond market saw hardening of yields on back of increasing global bond yields, rising crude prices and speculation of increased bonds supply due to announcement of bank recapitalization bonds. Globally bond yields hardened because of increasing expectation of rate hike by US Fed in December. US 10-year note closed the period at 2.38 versus 2.33 at the beginning of the period and hitting an intramonth high of 2.46. For the period under review India 10-year G-Sec yields hardened by 20 bps and closed at 6.86. Corporate bonds also followed suite with 10-year corporate bond yields up by 11 bps. However, 5 year corporate bonds saw buying interest because of increased FII limits and saw yields falling by 1 bps. Money market instruments at the shorter end of the curve saw 3-month treasury bill harden by 2 bps and 3-month and 12-month CD yields hardened by 5 bps. Net FPI inflows in Indian debt market stood at Rs. 16,063 crores for the month of October.

    On the macroeconomic data released during the period, September CPI inflation remained unchanged at 3.3% from a lower revision of August CPI to 3.3% as lower food inflation offset the rise in crude oil prices and a pickup in core inflation due to HRA increase and GST impact. Core CPI inflation rose to 4.6% in September from 4.4% (downward revision) in August. IIP rose to 4.4% in August compared to 1.2% YoY in July above the market consensus of 2.6%. The rise in IIP was broad based with all segments recording a sequential uptick. WPI inflation for September eased to 2.60%YoY from 3.24% in August, coming in below market expectations of 3.3%. The positive surprise came from the much sharper than anticipated correction in food items led by vegetables, despite buildup in fuel and manufacturing prices. On a sequential basis, WPI rose by 0.44% MoM.

    Government’s fiscal deficit has reached 91.3% of its full year target in April-September period, an improvement from August ratio of 96.1%. However, fiscal deficit is still tracking higher than the 83.9% of the budgeted target in the same period last fiscal year. Receipts as a % of budget are tracking lower than budget estimates currently and would require the government to manager expenditure to adhere to the 3.2% fiscal deficit target.

    The government announced a comprehensive recapitalization plan for public sector banks (PSB) amounting to Rs. 2,11,000 crores (1.3% of GDP) over two years (FY18 and FY19). Rs. 1,35,000 crores will be financed through recapitalization bonds, Rs. 18,100 crores through the budget and Rs. 58,000 crores through capital raising by banks. Recapitalization plan matched the estimates of capital requirements by PSU banks for both NPA provisioning and some growth. The step is positive for growth but this will only happen gradually as deleveraging and pickup in capacity utilization will take time. Recapitalization will be fiscally neutral except for the annual interest payments and recapitalization bonds will increase government debt by 0.8% of GDP either directly or indirectly via higher contingent liabilities.

    Systemic liquidity remained in a surplus mode and closed at Rs. 1,06,700 crores versus Rs. 1,75,000 crores at the beginning of the period. RBI announced OMO sale of Rs. 20,000 crores during the month to manage the surplus liquidity in the system.

    Going forward, we expect CPI to settle around 4.5% by Q4FY18. We expect the RBI to stay on hold in its December policy. RBI might move towards accommodation and lowering of policy rates going further if government adheres to the fiscal deficit target and if GDP growth remains low and core inflation sustainably remains below 5% by March 2018. We expect 10-year G-sec yield to trade range-bound in near term, within a band of 6.75%-6.90%. We expect liquidity to remain comfortable and in surplus mode for a few months going ahead which will limit upside in short-term rates.

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