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Market Commentary

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Debt Market

Debt Commentary – September 2018

30-Sep-18 31-Aug-18
Change (bps)
10 Year Benchmark Yield (s.a) 8.02% 7.95% 7
10 Year AAA (PSU) (ann) 8.86% 8.62% 24
5 Year AAA (PSU) (ann) 8.88% 8.62% 26
3 Year AAA (PSU) (ann)
8.85% 8.56% 29
1 Year AAA (PSU) (ann)
8.68% 8.45% 23
3 Month T Bill 6.99% 6.81% 18
3 Month CD 7.25% 7.04% 21
6 Month CD 8.53% 7.45% 108
9 Month CD 8.70% 7.58% 112
12 Month CD 8.83% 8.00% 83
10 Year AAA Spread 0.68% 0.51% 17
5 Year AAA Spread 0.70% 0.51% 19


Sovereign bond market remained volatile with a negative bias due to depreciating rupee, higher crude oil prices, expectations of rate hike and fiscal slippage. US bond yields hardened due to increased expectation of Fed rate hike due to strong growth and inflation in Fed’s target range. US Treasuries hardened to 3.18 compared to 2.86 at the beginning of the period after hitting a high of 3.21.  FOMC unanimously voted to hike the benchmark interest rate by a quarter-point to a range of 2% to 2.25% and predicted another hike by December and three more in 2019. India 10-year G-Sec yields hardened throughout the month and closed the month at 8.02 after hitting a mid-month high of 8.23 compared to 7.95 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 8.86 and 8.88 up by 24 bps and 26 bps respectively over previous month close. Money market instruments at the shorter end of the curve hardened on the back of tight liquidity conditions due to advance tax outflows. 3-month Treasury bill hardened by 18 bps while 3-month CD yields hardened by 21 bps and 12-month CD yields hardened by 83 bps. FPI activity saw net outflows of 11,600 crores for the month of September compared to an inflow of 4090 crores in the month of August 2018. Cumulatively, FPI outflows from debt market for FYTD stood at Rs. 53,244 crs. Indian Rupee continued to depreciate on the back of widening trade deficit, rising crude oil prices, strengthening dollar and regulators/government comfort for weaker rupee ending the period at 72.49 compared to 70.99 at the beginning of the period and 65.12 at the beginning of financial year. Crude oil prices increased during the month closing the month at 82.72 compared to 77.42 at the beginning of the period.

Government of India announced its borrowing calendar for dated government securities with gross borrowing reduced by 20k crores for H2FY19. Overall FY2019 gross borrowing via dated bonds has been reduced by around Rs70k crore (Rs50k crore in H1 and Rs 20k crore in H2) to Rs 5.3 trillion, with government increasing its funding requirement through the NSSF and reducing its buyback plan. Indian government announced measures to support INR, raising import tariffs on 19 items accounting for US$13 billion in imports (0.5% of GDP and about 3% of India’s import bill) by 2.5%-10% with immediate effect to try to narrow India’s current account deficit (CAD) which is tracking an unsustainable 3% of GDP this year. The impact of these latest measures could be limited as crude prices continues to remain elevated.

On the macroeconomic data released during the period, inflation predictably softened to 3.69% in August vs 4.17% in July, helped both by favorable base effects and muted sequential headline momentum. The muted headline momentum was mainly because of soft food prices which continue to surprise to the down side. Core inflation also moderated to 5.6% in August compared to 5.9% in July. India’s industrial production growth eased to 6.6% YoY in July compared to a downwardly revised 6.9% in June. Mining growth moderated to a three-month low of 3.7% YoY vs. 6.6% in June. Electricity growth expanded by 6.7% YoY vs. 8.5% in June. Manufacturing sector growth increased to a five-month high of 7.0 %YoY vs. 6.7% in June. India India’s CA deficit widened to 2.4% of GDP in Q2, from 1.9% of GDP in Q1, better than expected, as a wider trade deficit was partly offset by a rise in remittances, buoyed by a weaker rupee. With increase in global crude oil prices and ongoing recovery in domestic demand, the pressure on CAD is likely to increase going forward. In addition, the recent INR depreciation will act as an amplifier for the CAD/GDP ratio.

Systemic liquidity during the month of September remained negative and closing the period at negative 8,300 crs versus positive 24,600 crs at the beginning of the month. In last couple of weeks, money market rates had spiked (especially for NBFCs) because of tight liquidity conditions due to advance tax outflows as deficit has touched a high of 1.86 trillion during the week. To ease liquidity conditions, RBI conducted OMO purchase of 10k crore on September 27, 2018. Further RBI increased the facility to avail funds for liquidity coverage ratio to 13 percent from 11 percent, effective October 1. The increase will take carve out from the statutory-liquidity ratio that is available to banks to 15 percent of their deposits. In addition, RBI announced additional OMO purchase of 36k crore in the month of October based on its assessment of the durable liquidity needs going forward and the seasonal growth in currency in circulation observed in build-up to the festive season.

RBI in its monetary policy on 4th October, kept policy rates unchanged. However, it changed its monetary policy stance from neutral to calibrated tightening. This was done as it lowered its CPI target to 3.9 to 4.5% in the second half of the financial year 2018-2019, compared with 4.8% targeted in the previous August policy. RBI also lowered its CPI inflation target to- 4.8 % vs 5 % for the first quarter of next year. They have maintained the GDP growth forecast at 7.4 %, for the current financial year. They have lowered the first quarter 2019 GDP forecast to 7.4% vs 7.5% in the August policy. Rupee depreciation and higher oil prices are challenge for both GDP Growth and Inflation forecast. RBI is closely monitoring the NBFC situation and will take appropriate action to maintain financial stability. RBI wants to access the challenging global and domestic situation and its implications before moving on policy rates.

We expect 10-year G-sec benchmark to trade between 7.90%-8.20% range and 10-year Corporate bonds to trade in a range of 8.60%-8.85%. We expect the short-term rates to ease going forward as the liquidity turns neutral after being in deficit for few weeks now and RBI providing sustainable liquidity by conducting OMO purchases.

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