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Debt Market

Debt Commentary – May  2019

31-May-19 30-Apr-19
Change (bps)
10 Year Benchmark Yield (s.a) 7.03% 7.41% -38
10 Year AAA (PSU) (ann) 8.02% 8.35% -33
5 Year AAA (PSU) (ann) 7.50% 8.20% -70
3 Year AAA (PSU) (ann)
7.40% 8.06%  -66
1 Year AAA (PSU) (ann)
7.30% 7.91% -61
3 Month T Bill 6.13% 6.43% -30
3 Month CD 6.85%
7.25% -40
6 Month CD 7.03% 7.43% -40
9 Month CD 7.05% 7.50% -45
12 Month CD 7.17% 7.73% -56
10 Year AAA Spread 0.87% 0.80% 6
5 Year AAA Spread 0.35% 0.65% -31


Sovereign bond yields during the month rallied on the back of global bond rally, falling crude prices, increasing expectation of monetary easing due to slowing global and domestic growth and benign inflation. US bond yields eased to 2.12 from 2.50 at the beginning of the period. India 10-year G-Sec yields eased and closed the month at 7.03 compared to 7.41 at the beginning of the month. Corporate bond yields also followed suite and eased during the month with 10-year and 5-year bond yields ending the period at 8.02 and 7.50 down by 33 bps and 70 bps respectively over previous month close. Money market instruments at the shorter end of the curve also rallied on the back of improving banking system liquidity and increasing expectation of monetary easing. 3-month Treasury bill eased by 30 bps to close at 6.13. CDs with residual maturity of 6month to 1 year also eased by 40 bps and 56 bps respectively. FPI activity saw net inflow of 2,978 crores for the month of May compared to net outflow of 13,997 crores for the month of April. Cumulatively, FPI outflows from debt market for FY20 is at Rs. 11,000 crores. Indian Rupee remained volatile during the month closing at 69.70 compared to 69.56 at the beginning of the period. Crude oil prices decreased during the month and closed the month at 65.01 compared to 72.62 at the beginning of the period.

On the macroeconomic data released during the period, CPI inflation remained unchanged at 2.9% YoY in April from March below market expectation of 3.0%. Food inflation predictably picked up, increasing to 1.1% YoY from 0.3% in March. Fruit and vegetable prices have remained at the forefront of the increase, growing by a significant 6.1% MoM and 2.9%, respectively. Core inflation eased off to 4.5% YoY in April over 5.1% in March due to weaker domestic growth. Industrial production (IP) growth for March disappointed, moderating to -0.1% YoY from an already weak print of 0.1% in February below market expectation of 1.3%. Overall, IP growth averaged a dismal 0.5% YoY in Q1 2019 from 3.7% in Q4 2018, reflecting a broader downtrend in the industrial cycle. Downturn in the industrial sector is a consequence of the lagged effects of tighter financial conditions, the pullback in government spending, uncertainty ahead of the coming elections and weaker global growth. GDP growth slid further to 5.8% YoY in Q1 2019 versus 6.6% in Q4 2018, in line with our expectations, but below market expectations of 6.3%. While base effects are partly at play, sequential growth momentum has also eased, as suggested by the deceleration in core GVA growth to 6.1% YoY from 7.1% in Q4.

RBI’s Monetary Policy Committee reduced the policy repo rate by 25 basis points from 6.00% to 5.75% as per the market consensus and changed the stance to “Accomodative”. MPC now expects H1-FY2020 CPI inflation at 3.0-3.1% from 2.9-3.0% earlier and H2-FY2020 inflation at 3.4-3.7% from 3.5-3.8% earlier, with risks broadly balanced. MPC revised down its FY2020 growth expectations to 7% from 7.2% earlier - growth in H1-FY2020 is expected at 6.4-6.7% from 6.8-7.1% earlier and in H2-FY2020 at 7.2-7.5% from 7.3-7.4% earlier, with risks evenly balanced. 10-year Gsec benchmark yield softened post policy announcement as market participants were divided over the policy outcome (especially on stance).

Systemic liquidity during the month of May hit a peak negative of 82,000 crores and eased to positive 14,300 crores compared to a negative 94,400 crores at the beginning of the month. To ease liquidity conditions, RBI conducted OMO purchases of Rs. 25,000 crores in the month of May and has also announced an OMO purchase of 15,000 crores for the month of June to manage liquidity. RBI had conducted OMOs to the tune of Rs. 2,98,500 crores in FY19 to manage liquidity. Going forward the liquidity is expected to remain positive with government spending kicking in and currency in circulation remaining benign in an industrially slow season.

Going forward, we expect RBI to deliver another 25 bps cut in FY20 given slowing global and domestic growth, benign inflation and falling crude prices. We expect RBI to maintain banking system liquidity in surplus mode to support pass through of rate cut in banking system. Lower headline inflation, slowdown in global growth and dovish developed markets reserve banks and domestic slowdown in growth will provide more comfort for further monetary easing. However, inflation risks could materialize due to poor monsoons, fiscal slippage and increasing food prices which might prevent further easing. We expect new 10-year Gsec benchmark to trade between 6.70-7.00 range and 10-year Corporate bonds to trade in a range of 7.85%-8.15%. We expect the short-term rates to remain dependent on systemic liquidity.

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