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1 $ DEBT Market Review $ currency banking $ growth Credit mortgage money economy currency losspoverty Shares money Credit banking business wealth poverty banking recession broke bankruptcy Credit loss economy currenc savings mone recession broke investmen bond money poverty m DEBT recession broke Shares loss banking Credit finanical bond News/Announcements Money Market T-bills Market G-Secs Market Corporate Debt Market Currency Rates Sh News/Announcements January 216 Domestic news Reserve Bank of India in its fifth bi-monthly monetary policy presented on 1st December'15 maintained a status-quo on its key interest rates citing unfavorable movement in retail inflation. Repo rate was kept unchanged at Accordingly, the reverse repo stood at 5.75 and MSF at In the mid- term economic review report released by the finance ministry, the government expects India's economic growth to be between and inflation at 6 for the current fiscal. It also indicated that the economy is likely to be driven by government efforts with increase in tax revenues and a simultaneous improvement in the quality of expenditure. Current Account deficit for Q2FY16 was recorded at 1.6 of GDP against 1.2 of GDP in Q1FY16. The deficit at $8.2 bn was lower than that last year at $ 1.9 bn, but higher than Q1. This is attributed to the improvements in the trade deficit which was lowered to $37.4bn in the September'15 quarter compared to $39.7 bn in the same quarter last fiscal. The decline in trade deficit is attributed mainly due to sharp decline in imports on account of the persistent decline in commodity prices viz. crude oil. Index of Industrial production (IIP) contracted by 3.2 for November'15 over a positive growth 5.2 in November'14. The negative growth was led by the contraction in output of manufacturing segment (4.4) particularly that of capital goods (- 24.4). The core sector growth, which comprises of 8 infra industries which carries a weight of 38 in the IIP (Index of Industrial Production), declined by negative 1.3 in November'15 (8.5 last year). The sectors contributing to this de-growth were cement and steel which recorded negative growth rates (of 1.8 and 8.4 respectively) and electricity which saw its growth at zero. Overall, for the first 8 months of the year, growth was at 2 compared with 6 last year. Retail inflation fordecember'15 came in at 5.6, an increase from last month's 5.4. Food inflation witnessed significant rise to 6.3 from 6.1 in December'15, led by a 46 rise in prices of pulses. WPI inflation moderated for the month of December'15 to (-).7 from (-)2 in November'15. WPI index has been under pressure due to persistent rise in primary articles. Global news European Central Bank decided to continue with its quantitative easing programme without any increase in the quantum of 6 bn a month till 217. The policy kept the interest rate on key financing operations unchanged at.5 while it lowered the deposit rate for funds kept with ECB to -.3. U.S. Federal Reserve in its meet on 16th December'15 changed the Federal funds interest rate from -.25 to i.e. an increase of.25. It also indicated that it would take an accommodative stance going ahead. China's trade surplus increased to US$6.1 billion in December'15 from US$49.6 billion reported a year earlier, helped by the lower than expected decline in exports and imports. Exports declined by 1.4 (y/y) while imports decreased by 7.6. It is the 13th straight month of contraction. Inflation in the Euro Area was.1 (y/y) in November'15, according to preliminary data. The downward effect of falling energy prices is easing, with a November'15 decline of -7.3 (y/y), compared with in October'15. Inflation has been below the ECB's 2 target since January'13. Industrial and manufacturing production in the U.K. fell sharply in November'15. Manufacturing was.4 lower in November'15 (m/m) in part due to the strength of the pound, while industrial output was.7 down (m/m), led by lower oil production in a context of sliding prices. China's inflation rate edged up to 1.6 (y/y) in December'15, from the 1.5 rise in November'15. Food prices increased 2.7 while nonfood cost rose at a slower 1.1. Cost of consumer goods gained 1.5 and those of services advanced 2.1. The U.S. trade deficit narrowed to $42.4 billion in November'15, compared with $44.6 billion in October'15, reflecting weak overseas demand, low commodity prices, and exchange rate movements. Imports fell by 1.7 (m/m) led by lower imports of consumer goods. Exports were down.9, to the lowest level since January'12. U.K. policy interest rates were left unchanged at.5, a record low that has been in place since March'9. The Bank of England's Monetary Policy Committee noted its objective of returning inflation to the 2 target gradually, without overshooting. 1

2 In the Sovereign Ratings Domain Brazil's sovereign credit rating was cut to junk status by Fitch Ratings, which became the second major ratings agency to strip the country of its investment grade this year. The downgrade left Brazil's rating at 'BB+', with a negative outlook. The agency cited the country's ballooning budget deficit, political turmoil, and worse-thanexpected recession behind the move. Moody's upgraded South Korea's issuer and bond ratings to Aa2 from Aa3, the highest ever for the country and changed the outlook from positive to stable. It cited that the very high institutional strength will support continued implementation of structural reforms, further promoting economic and fiscal resilience. Moody's revised the outlook for Malaysian government's A3 rating to stable from positive due to negative impact of changes in the external environment on the Southeast Asian economy's growth. It expects that despite progress on fiscal consolidation, Malaysian public debt burden and debt affordability will see only limited improvement over the outlook horizon. Fitch ratings downgraded South Africa's long term foreign and local currency issuer rating to BBB- from BBB and to BBB from BBB+ respectively owing to weak performance in terms of GDP growth. The sovereign ratings given by ARC Ratings as of date are given in table 1 below. Table 1: Sovereign Ratings by ARC Ratings average in the first week and climbed thereafter to peak in the third week. The call rate too witnessed fluctuations ranging between during the month of December'15.. The average rate for the month was recorded at Table 2: Movement of interest rates, FIMMDA Corporates issued a total of Rs. 11.3lkh Cr. of commercial paper during the period of 1st April '15 15thDecember'15 which is approximately 38 higher than the amount issued during the corresponding period of the previous fiscal. Exhibit 2: CP issuance during 1st Apr '15-15thDec'15 CP issuance (Rs. crore) 1,4, 1, 1,, 8, 6, 4, Apr-15 3-Apr May'15 31-May Jun Jun Jul Jul Aug Aug Sep-15 3-Sep Oct Oct Nov-15 3-Nov Dec CP vol 18-days rate 364-days rate Source: ARC Ratings *CARE Ratings is one of the four partners Money Markets Liquidity conditions for the month of December tightened further with festive season draining currency from the system. The RBI conducted repo and reverse repo auctions of various tenors. It conducted repo auctions of Rs.2,68, crore to inject money into the system, simultaneously the reverse repo auctions were conducted amounting to Rs.13,943 crore. Exhibit 1 given below depicts the dynamics of the domestic money market during the month of December '15. CP rates for the 18-days and 36-days papers moved upwards in December'15. Yields on 18-days CP were higher by 15 bps at 8.13 compared with the previous month Simultaneously, yield for 36-days paper inched up by 8bps settling at 8.27 compared to last month's close of T-Bills Market In accordance with the calendar for T-bills auction, a total of Rs. 7, Cr. was raised through T-bills in December'15.Table 3 below records the details of Treasury bills auctions for various tenures held during the month of December'215. Table 3: Treasury bills auctions held during December , 7.5 Repo Borrowings (Rs.crore) 16, 12, 8, 4, 6.7 December 1, December 31, 215 Repo Borrowings MIBOR MIBOR rate was volatile in the month of December'15 as it recorded a fluctuation of 44bps around the average of 6.9. The rates were below The total amount auctioned during December'15 through T-bill was higher than previous month's auction of Rs.56,. The average yield for 91-days T-bills was higher by 7bps compared to last month's (7.13). The average yield for 18-days T-bills was higher for December'15 vis-à-vis November'15 by 4bps (November'15 was 7.2). Average yield for 364-days T-bills fell by 1bpto 7.23 in December'15 compared to the 7.24 in November'15. 2

3 G-Securities Market A) Primary G-Securities Market (Domestic) G-sec auctions aggregating Rs. 19, Cr. were held during the month of December'15, significantly lower than Rs. 45, Crauctioned during the month of November'15. Yields for these G-sec auctions were in the range of 7.35 to The average yield remained virtually flat at 7.81 compared with 7.82 over the previous month. Exhibit 3 captures the movement in the 1-yr G-Sec yield in Dec' 15. Exhibit 3: 1-yr G-Sec yield in Dec '15 Benchmark yields ended mixed across various maturities. The yields of short term papers ended higher while most of the medium term papers registered a fall in yields. The highest increase in yields was 9 bps recorded for paper with.25 yrs of maturity while the sharpest decline of 12 bps in yield was recorded by the 7 yr maturity paper. Yields for 1 yr, 3yrs, 1, yrs, 15 yrs and 2 yrs maturity papers remained stable. Accordingly, the average yield stood 2 bps lower at 7.64 compared with 7.66 a month ago. C) Sovereign Bond Yields in the Global Context Table 5: Yields on different tenure bonds () Dec 3-Dec 5-Dec 7-Dec 9-Dec 11-Dec 13-Dec 15-Dec 17-Dec 19-Dec 21-Dec 23-Dec 25-Dec 27-Dec 29-Dec 31-Dec Table 4 below provides the State development loans auctions for December' state governments conducted auctions of SDL (1 yr securities) during December'15 aggregating to Rs.26,512.5 crore, with Rs crore being accepted. Table 4: State Development Loans (1-year) for December 215 Source: Economist, December, 215 $- 5-year yield Yields across the major global economies ended mixed in December'15. The short term yields for Euro Zone and Greece continued to remain negative witha further decline compared to month ago levels. Russia too recorded a decline in yield by 25bps.However, yields for the remaining economies viz. for USA, India and Brazil ended higher registering an increase of 2bps, 6 bps and 4 bps respectively. Likewise, long term yields for the economies too ended mixed during the month. USA, Euro zone, India, Brazil and Greece witnessed an upward movement in yields while Russia and Japan ended lower. The highest increase of 17bps was recorded by Euro zone and the sharpest decline of 14bps by Russia. Bank Credit Table 6captures the information on growth in bank credit during the first 8 months of the year across the major sectors. The growth in credit has remained almost stable at 4 compared with 3.9 last year led mainly by the services sector and personal loans segment. The services segment was driven by pick up in transport and tourism sectors while demand for personal loans increased for housing and credit cards. Table 6: Sectoral distribution of credit B) Secondary G-Securities Market (Domestic) Exhibit 4 captures the yield curves as of the end- of-month for the last three months of October'15, November'15 and December'15. Exhibit 4: Benchmark Yield Curve Oct-15 3-Nov-15 3-Dec-15 Source: FIMMDA 3

4 Table 7: Growth in credit to Manufacturing: Industry-wise B) Ratings The rating changes for the month of December '15 are given in Table 9 below. Table 9: Rating changes during December'15 * As can be seen, growth in credit to manufacturing segment though has turned positive is much lower compared to the year ago levels. The growth in manufacturing was driven by only 6 sectors viz, wood products, paper products,engineering, infrastructure and basic metals while the growth decelerated across the remaining sectors. Corporate Debt Market A)Issuances : 43 Corporates issued a total of Rs. 22, crduring the month of December '15 through various debt instruments such as bonds and non-convertible debentures. Table 8 highlights select debt issuances during the month gone by. Table 8: Select Debt Issues during December '15 *securitized deal: 2nd loss instrument of HDFC (Based on press releases made by Rating Agencies across India) Exhibit 5: AAA Spreads bps Maturity (yrs) 3-Oct-15 3-Nov Dec-15 Source: FIMMDA Corporate bond spreads across all maturities were significantly higher for the month of December'15 compared to the last 2 months of October and November The maximum increase in spread was seen in the 2yr maturity paper (29bps) followed by 4-yr, 5-yr and 1-yr maturity papers with spreads being 28bps, 27bps and 26bps higher than November'15 respectively. 9yr and 1-yr maturity papers showed the least rise in yields (1bps and 15bps respectively), with the remaining papers (1yr, 3-yr and 6-yr) 4

5 maturity papers rising by around 26bps and 2bps respectively relative to last month. FIIs and Mutual Funds in Debt Markets Investments in mutual funds have witnessed continuous increase in inflows since October'15. The net investments in Mutual fund debt segment picked up by 27 in December'15 from last month's net investment level of Rs.3,839 crore. In contrast, FIIs were seen withdrawing in net terms for the second month in a row. The net outflow from the debt segment was recorded at $824 million, significantly higher than the $57 million in the previous month. This was largely being attributed to the be on account of the strengthening U.S. dollar on the back of U.S Fed rate hike announced during the month of December'15. The exhibit 6 below depicts the trends in net FII inflows and Mutual Fundinvestments in domestic debt securities for FY16 until December'15. Exhibit 7: Rupee movement Rs/$ Source: FIMMDA Table 1: Currency Rates Rs/$ Rs/Euro Linear (Rs/$) 65 December 3, 215 Rs/Euro Exhibit 6: FIIs and Mutual Fund Investments in Domestic Debt Securities Rs. Cr. 6, 54,655 5, 39,163 15, 4, 29,494 24,189 25,11 3,839 1, 3, 22,627 17,389 16,634 5, -1, ,421 1, , Apr '15 May '15June '15 July '15 Aug'15 Sep '15 Oct '15 Nov'15 Dec'15 US $ mn Mutual Funds in debt securities FIIs in debt securities Source: CDSL, SEBI Currency Rates Rupee weakened gradually against the U.S dollar during the first half of December'15. Compared to Rs.66.67/$ on 3th November'15, the rupee witnessed a.6 depreciation crossing the Rs.67/$ mark on 14th December'15, the lowest during the year.the domestic currency followed the cues from its Asian peers, as emerging market investors began to factor in the imminent U.S. Fed rate hike that was to be announced on 16th December'15. This has been mirrored in the rising FII outflows (Debt segment) from the country. However, the trendreversed post Fed rate hike with rupee settling at Rs.66.39/$ by month end. On an average, the rupee depreciated by.7 duringdecember'15over November'15. Likewise, the rupee fell sharply against the Euro up till 15th December'15which recorded the lowest at Rs.73.71/Euro. It depreciated as much as 4.6 from Rs.7.47 per Euro on 3th November'15. In line with the rupee dollar movement, the rupee too began to gain against the Euro post Fed rate hike. The rupee settled at Rs.72.52/Eurotowards the month end.however, the monthly average stood1.76 lower at Rs in comparison to the average of Rs in November'15. The exhibit 7 below captures the movement in the exchange rates over the last few months from 1st April '15 to 3thDecember'15. 5

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