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Debt Market

Debt Commentary – March 2018

28-Feb-18 31-March-2018
Change (bps)
10 Year Benchmark Yield (s.a) 7.73 7.40 (33)
10 Year AAA (PSU) (ann) 8.27 8.17 (10)
5 Year AAA (PSU) (ann) 8.02 7.87 (15)
3 Month T Bill 6.28 6.11 (17)
3 Month CD 7.23 7.08 (15)
12 Month CD 7.54 7.37 (17)
10 Year AAA Spread 39 63 24
5 Year AAA Spread 33 34 1

Sovereign bond market yields softened during the month due to lower CPI and reduction in FY2019 gross borrowing announcement in the last week of the month. Globally bond yields also softened due to less hawkish FOMC and fears of global trade war. US 10-year note touched a high of 2.94 before closing the period at 2.76 versus 2.90 at the beginning of the period. For the period under review India 10-year G-Sec yields softened by 33 bps and closed at 7.40. Corporate bonds also followed suite with 10-year and 5-year corporate bond yields softening by 10 bps and 15 bps respectively. Money market instruments at the shorter end of the curve saw 3-month Treasury bill softening by 17 bps and 3-month and 12-month CD yields fell by 15 bps and 17 bps respectively. Net FPI outflows in Indian debt market stood at Rs. 9043 crores for the month of March 2018.

Crude oil prices firmed up during the month as greater compliance by OPEC (& non-OPEC) on production cuts and geo-political tension provided support. Brent Spot closed the period under review at 69.13 from 64.02 per barrel at the beginning of the period.

On the macroeconomic data released during the period, February CPI inflation surprised on the lower side at 4.44% versus 5.1% for January. The fall in CPI was primarily due to sharp fall in vegetable prices. IIP for the month of January came at to 7.47% YoY vs. 7.07 %YoY in December, indicating a sustained growth recovery in progress.

Government of India over-delivered on measures to calm the nervous bond market. Overall FY2019 gross borrowing via dated bonds has been reduced by Rs 500 billion to now Rs 5.56 trillion, with government increasing its funding requirement through the NSSF by additional Rs250 billion and reducing its buyback plan by Rs250 billion. Out of that, Rs2.88 trillion will be issued in H12019, implying ~51.8% of the revised FY2019 gross borrowing, as against the usual front-loading pattern of ~60-65%. H12018 had seen Rs3.72 trillion of gross issuances, ~64% of total gross borrowing. The bigger takeaway however was the reduction in concentration of supply in belly of the curve (10-14 year segment) to 29.2% of H1-2019 gross borrowing from ~52% in 1HFY18.The supply at the short end of the curve has increased, with a new 1-4 year segment bearing ~8.3% of the total H1-2019 issuances. The extreme long end of 20yr+ segment also sees 22.6% of total issuances (as against ~14% in H1-2018).

Systemic liquidity tightened during the month due to advance tax outflows and GST outflows from almost neutral at the beginning to a deficit of Rs. 1.33 trillion at the end of the period in consideration.

Going forward, we expect March CPI to come at around 4.1-4.3 % and rise thereafter due to unfavorable base effect. We expect the RBI to stay on hold in its April policy. We don’t expect any further rate cuts by RBI as the inflation is accelerating and growth prospects are improving. Monsoon is expected to be normal as per Skymet, an Indian weather forecaster. This should keep headline CPI inflation under check as 48.5 % of the items in the CPI basket consists of food and related items. We expect 10-year G-sec yield to trade range-bound in near term, within a band of 7.00%-7.50% and 10-year Corporate bonds to trade in a range of 7.85%-8.25%. Short term rates which increased due to tightening liquidity conditions should come down in April with improving liquidity conditions.

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