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Debt Market

  • Jul 12, 2017

    Debt Commentary – August 2017

    31-Aug-17 31-Jul-17 Change (bps)
    10 Year Benchmark Yield (s.a) 6.53% 6.47% 6
    10 Year AAA (PSU) (ann) 7.35% 7.34% 1
    5 Year AAA (PSU) (ann) 7.05% 7.15% -10
    3 Month T Bill 6.09% 6.13% -4
    3 Month CD 6.23% 6.18% 5
    12 Month CD 6.48% 6.57% -9
    10 Year AAA Spread 0.72% 0.77% -5
    5 Year AAA Spread 0.42% 0.58% -16

    Sovereign bond market saw hardening of yields after the 3rd Bi-monthly monetary policy meeting because of neutral stance by RBI and market participants expecting a pause in rates. Globally bond yields remained volatile on the back of escalating tensions in North Korea which caused flight to safety and led to a rally in US and Japan sovereign yields. US 10-year note closed the period at 2.12 versus 2.25 at the beginning of the period. For the period under review, India 10-year G-Sec yields hardened by 6 bps and closed at 6.53. However, 10-year corporate bond yields hardened by 1 bps and 5-year corporate bond yields softened by 10 bps as participants looked to reduce duration. Money market instruments at the shorter end of the curve saw 3-month treasury bill soften by 4 bps, 3-month CD yield hardened by 5 bps and 1 year CD yield eased by 9 bps. Net FPI inflows in Indian debt market stood at Rs. 15,249 crores for the month of August.

    RBI in its 3rd Bi-monthly monetary policy meeting reduced the repo rate by 25 basis points from 6.25% to 6.00%. MPC reiterated its neutral stance and remained relatively cautious on the inflation outlook. It was a split verdict, with 5 members voting to cut rates and one voting to stay on hold. MPC recognized that the previously foreseen upside risks to inflation had either reduced or not materialized. They acknowledged that core inflation has fallen significantly over the last three months, roll out of GST has been smooth and monsoon has progressed normally. However, MPC pointed out that inflation is expected to accelerate going forward from June lows and is not entirely convinced whether the disinflation is transient or structural in nature. They acknowledged that going forward base effect will start to fade and several factors pose an upside risk to inflation like implementation of 7th pay commission, price revision withheld before GST, implementation of farm loan waivers, states’ implementation of salary and allowances etc.

    On the macroeconomic data released during the period, July CPI inflation rose higher than expected to 2.4% from 1.5% in June, on back of higher vegetable prices and a pickup in core inflation owing to GST. Core CPI inflation rose to 4.1% in July from 3.8% in June. WPI inflation rose higher than expected to 1.9% in July from 0.9% in June. Food price inflation rose sharply because of 49% MoM rise in vegetable prices, which alone contributed 0.6% to WPI inflation. Trade data for the month of July suggest underlying weakness in both export and import volume growth with export growth moderated to 3.9% YoY in July from 4.4% YoY in June and import growth decelerated to 15.4% YoY in July from 19% YoY in June. GDP growth in Q2 slowed down to 5.7% YoY from 6.1% in Q1, and GVA growth unchanged at 5.6%. Overall, the data suggest that the growth profile remains uneven with still lackluster industry/investment demand but steady services/consumption demand.

    Systemic liquidity remained in a surplus mode and closed at Rs. 2,67,000 crores versus Rs. 2,79,000 crores at the beginning of the period and hitting a high of Rs. 3,38,000 crores due to huge maturities of government securities. RBI announced OMO sale of Rs. 20,000 crores during the month to manage the surplus liquidity in the system.

    Going forward, since MPC has retained the neutral stance and gave a neutral view about further policy action, market will be governed by upcoming macro-economic data. We believe that RBI might move towards accommodation and lowering of policy rates provided core inflation normalizes below 4% by March 2018. We expect 10-year G-sec yield to trade range-bound in near term, within a band of 6.40%-6.55%. 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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