Debt Perspective May 2018
Debt Markets - Review
Bond Market Overview Government bond yields rose in April. The 10-year government bond yield rose 47bps during the month, to end at 7.77%. Bond markets traded with negative bias as rise is US Treasury yields, strengthening of the dollar, continuous rise in crude oil prices and a slump in rupee have heightened fears of foreign investment outflows from the domestic debt market; which impacted bond markets severely. Moreover, persisting geo political tensions too dampened the risk appetite of market participants. Further, expectations of increase in interest rates by the US Federal Reserve in the coming months have weighed on market sentiment. The Consumer Price Index (CPI)-based inflation or retail inflation grew 4.58% in Apr 2018, up from 4.28% in Mar 2018 and from 2.99% in Apr 2017. The increase reflects increase in prices of fruits and vegetables by 9.65% and 7.29%, respectively. Growth in the wholesale price index (WPI) accelerated from 2.47% in March to 3.18% with inflation in the crude petroleum and natural gas segment surging to 15.5% in April from 8.23% in the previous month. Factory output grew 4.4% in March 2018, much lower than the 7.1% print recorded in previous month. This is the first time in four months that the Index of Industrial Production (IIP) recorded less than 7%. India s export during the month of Apr 2018 grew 5.17% YoY to $25.91 billion from $24.64 billion in Apr 2017. Meanwhile, imports grew 4.60% YoY to $39.63 billion in Apr 2018 from $37.88 billion in the same period of the previous year. Trade deficit widened to $13.72 billion in Apr 2018 as against $13.25 billion in Apr 2017 and $13.69 billion in Mar 2018.
Debt Roundup Apr 18 Mar 18 Change Call Rates/Interest Rates Call Rates 6.15% 6.10% 5bps Repo rate 6.00% 6.00% 0bps Statutory Liquidity Ratio (SLR) 19.50% 19.50% 0bps CD Rates 3 month 7.15% 6.90% 25bps 6 month 7.40% 7.15% 25bps 1 Year 7.70% 7.25% 45bps CP Rates 3 month 7.60% 7.50% 10bps 6 month 7.80% 7.70% 10bps 1 Year 8.10% 7.80% 30bps T-Bill/G-sec 91 Days 6.19% 6.11% 8bps 364 Days 6.50% 6.40% 10bps 7.17% GOI 2028 7.77% 7.30% 47bps Corporate Bonds (PSU) 1 Year 7.80% 7.35% 45bps 3 Year 8.20% 7.57% 63bps 5 Year 8.40% 7.77% 63bps 10 Year 8.45% 7.88% 57bps International Markets 10 Year US Treasury 2.96% 2.79% 18bps 3 Months LIBOR 2.36% 2.29% 7bps 12 Months LIBOR 2.78% 2.67% 11bps Brent Crude ($) 74.19 69.59 4.6 Gold ($) 1321.95 1340.37 18.42
Yield Curve- Movement Analysis 3 months 6 months 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 10 year 30/04/2018 31/03/2018 8.1 7.9 7.7 7.5 7.3 7.1 6.9 6.7 6.5 6.3 6.1 Government bond yields rose in April. The 10-year government bond yield rose 47bps during the month, to end at 7.77%. Bond markets traded with negative bias as rise is US Treasury yields, strengthening of the dollar, continuous rise in crude oil prices and a slump in rupee have heightened fears of foreign investment outflows from the domestic debt market; which impacted bond markets severely. Moreover, persisting geo political tensions too dampened the risk appetite of market participants. Further, expectations of increase in interest rates by the US Federal Reserve in the coming months have weighed on market sentiment.
Indian Economy - Review
Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 Industry India s IIP growth falls to five-month low of 4.4% in March; April retail inflation quickens to 4.58% WPI inflation rises to 3.18% in April on costlier fuel, fruits; retail inflation inches up to 4.58% in April WPI CPI 8% 7% 6% 5% 4% 3% 2% 1% 0% 3.85% 2.99% 2.18% 2.26% 1.54% 0.90% 2.36% 1.88% 3.36% 3.24% 2.60% 3.59% 3.58% 4.88% 3.93% 5.21% 5.07% 3.58% 2.84% 4.44% 4.28% 4.58% 3.18% 2.48% 2.47% March IIP growth skids to 4.4%, Manufacturing growth falls to 51 in Mar 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% 1.02% -0.10% 3.30% -1.4% -1.20% -0.8% 3.75% 0.2% 4.00% 3.10% 4.70% 1.70% -0.10% -7.4% 0.90% -1.20% 4.50% -2.70% 3.80% -1.70% 2.20% -7.50% 8.40% 0.60% 10.30% 7.10% 7.50% 7.10% 4.00% 2.80% 4.40% -2.90% Mar-18 Feb-18 Jan-18 Dec-17 Nov-17 Oct-17 Sep-17 Aug-17 Jul-17 Jun-17 May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 IIP PMI
8.5 RBI keeps repo rate unchanged at 6% for the fourth time; Central bank's stance signals positive change CRR % Repo % Rev Repo % SLR %(RHS) 23.0 7.5 6.5 5.5 4.5 3.5 Jul-15 Oct-15 Feb-16 Jun-16 Oct-16 Jan-17 May-17 Sep-17 Jan-18 May-18 22.0 21.0 20.0 19.0 18.0 The RBI Governor Urjit Patel-led monetary policy committee (MPC) maintained status quo on repo rate - at 6% for the fourth time and retained its neutral stance, in its first bi-monthly policy review of 2018-19. The policy decision was in line with the market expectations. Reverse repo was kept unchanged at 5.75%. No changes were made to cash reserve ratio (CRR) and statutory liquidity ratio (SLR), which stand at 4% and 19.5%. The statement was more dovish than expected particularly because of the cut in inflation forecasts. Five on the six-member monetary policy committee voted for the decision, with one seeking a hike. The RBI revised CPI inflation projection for 2018-19 to 4.7-5.1% in the first half of the financial year and 4.4% in the second half, including the HRA impact for central government employees, with risks tilted to the upside. However, the minutes of MPC s latest monetary policy meeting showed that the committee could adhere to a more hawkish stance beginning June 2018. The MPC has identified several aspects namely increase in minimum support prices for farmers and high global crude oil prices that may lead to an increase in retail inflation.
Global & Currency Markets - Review
02-Apr-18 04-Apr-18 06-Apr-18 08-Apr-18 10-Apr-18 12-Apr-18 14-Apr-18 16-Apr-18 18-Apr-18 20-Apr-18 22-Apr-18 24-Apr-18 26-Apr-18 28-Apr-18 30-Apr-18 Apr16 Aug16 Dec16 Apr17 Aug17 Dec17 Apr18 Dollar index movement in the past 1 month Indian Bond yields moved up above 7% since Nov17 92.0 DXY Index 3.5 Germany - 10 Year US - 10 Year India - 10 Year (RHS) 9.0 91.5 91.0 90.5 90.0 89.5 89.0 3.0 2.5 2.0 1.5 1.0 0.5 0.0 8.0 7.0 6.0 5.0-0.5 4.0 The 10 year US-India bond yield spread has increased in April 2018; the spread has increased from 482 bps in Mar 2018 to 481 bps in Apr 2018. US bond yields inched up by 18 bps during the month on fears of a trade war and its impact on growth.
Emerging markets bond yields 10 Year Gsec Yield (% mth end) 2015 end 2016 end 2017 end Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 3m change in bps Brazil 16.5 11.4 10.2 9.9 10.4 10.2 9.7 9.6 9.5 9.8 12 China 2.8 3.0 3.9 3.9 3.9 3.9 3.9 3.9 3.8 3.6-31 India 7.8 6.4 7.1 6.9 7.1 7.1 7.6 7.9 7.3 7.8 20 Indonesia 8.7 7.9 6.3 6.8 6.5 6.3 6.3 6.6 6.7 6.9 56 Korea 2.1 2.1 2.5 2.6 2.5 2.5 2.8 2.7 2.6 2.7-3 Malaysia 4.2 4.2 3.9 4.0 3.9 3.9 3.9 4.0 4.0 4.1 18 Philippines 3.9 4.6 5.7 4.8 5.7 5.7 6.2 6.7 6.0 6.1-16 Russia 9.6 8.4 7.6 7.6 7.6 7.6 7.2 7.0 7.1 7.3 4 South Africa 9.8 8.9 8.6 9.1 9.3 8.6 8.5 8.1 8.0 8.2-28 Taiwan 1.0 1.2 0.9 1.0 1.0 0.9 1.0 1.0 1.0 1.0-7 China, South Africa and Philippines saw the sharpest fall in bond yields in last three months While, Indonesia, India and Malaysia saw the highest rise in bond yields in last three months Thailand 2.5 2.6 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 7
Debt Markets - Outlook
Key Variables - Outlook & Impact on Benchmark Rates Key Variables Short Term Long Term Inflation Rupee Credit Demand RBI Policy Global Event Risk Liquidity
Outlook & Investment strategy Yields continued northward journey in April. External factors like rising US Treasury yields and commodity prices continue to play spoilt sport. The yields rose 47bps m-o-m. Moreover, political uncertainty, Higher than expected CPI Inflation & sharp depreciation in USD-INR currency pair; have also led to rise in Government bond yields. The risks such as rising oil prices & higher US Treasury yields have started to play out. This has been a clear point of concern as far as the RBI is concerned and which they have clearly highlighted in the MPC minutes. Higher Oil prices not only affect inflation but also change the Fiscal math as well as the Current Account Dynamics & the Balance of Payment Dynamics. From a markets perspective, it is a given that the RBI will continue to be hawkish. Moreover, bond yields and liquidity have already tightened in anticipation of aggressive rate hikes. Accordingly, we expect bond yields to be volatile in the short term and; we continue to suggest accrual based funds and also suggest to look at investment in short term bond funds.
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