Debt Perspective Mar arch 20 2018 18 Debt Markets - Revie iew - - PowerPoint PPT Presentation

Debt Perspective

Mar arch 20 2018 18

Debt Markets - Revie iew

• The 10-year bond yield ended the month at 7.68%, 28 bps higher than the previous month (7.40%).
• Bond yields rose to the highest since February 2016 after the minutes of the central bank’s policy meeting showed that a majority of the members of the

monetary policy panel turned hawkish at the February policy meet, even as they kept rates on hold.

• Rise in global crude oil prices also weighed on the bond market. Moreover, rise in yields was due to rise in 10- year U.S. treasury yields, volatility in oil

prices and following comments from Federal Reserve Chairman Jerome Powell that raised concerns of faster-than-expected hikes in U.S. interest rates.

• India’s Wholesale Price Index-based inflation (WPI) slowed to a seven-month low of 2.48% in Feb 2018 from 2.84% in the previous month and 5.51%in the

same month of the previous year. Wholesale inflation grew at a slower pace due to softer rise in food and fuel prices. The WPI Food Index also decreased from 1.65% in Jan2018 to 0.07% in Feb 2018.

• On the other hand, the Consumer Price Index (CPI) based inflation or retail inflation grew 4.44% in Feb 2018,down from 5.07% in the previous month and

up from 3.65% in the same month of the previous year. Though retail inflation growth subdued, it surpassed Reserve Bank of India’s medium-term target

• f 4% for the fourth consecutive month. The Consumer Food Price Index also grew 3.26% in Feb 2018, down from 4.70% in the previous month and up

from 2.01% in the same month of the previous year

• India’s Index of Industrial Production (IIP) grew 7.5% in Jan 2018 as against growth of7.1% in Dec 2017 and 3.5% in the same period of the previous year.

The manufacturing sector also surged 8.7% in Jan 2018 from 2.5% growth in the same period of the previous year. However, IIP growth for Apr to Jan 2018 slowed to 4.1% from 5.0% in the same period of the previous fiscal.

Bond Market Overview

Debt Roundup

Feb’18 Jan’18 Change Call Rates/Interest Rates Call Rates 6.05% 6.00% 5bps Repo rate 6.00% 6.00% 0bps Statutory Liquidity Ratio (SLR) 19.50% 19.50% 0bps CD Rates 3 month 7.30% 7.30% 0bps 6 month 7.55% 7.35% 20bps 1 Year 7.59% 7.55% 4bps CP Rates 3 month 7.90% 7.92% 2bps 6 month 8.05% 8.10% 5bps 1 Year 8.15% 8.10% 5bps T-Bill/G-sec 91 Days 6.27% 6.40% 13bps 364 Days 6.65% 6.54% 11bps 6.79% GOI 2027 7.86% 7.57% 29bps Corporate Bonds (PSU) 1 Year 7.70% 7.57% 13bps 3 Year 7.83% 7.70% 13bps 5 Year 8.07% 7.80% 27bps 10 Year 8.40% 7.98% 42bps International Markets 10 Year US Treasury 2.86% 2.71% 16bps 3 Months LIBOR 1.98% 1.77% 21bps 12 Months LIBOR 2.47% 2.26% 21bps Brent Crude ($) 66.23 68.46 2.23 Gold ($) 1317.79 1342.07 24.28

Yield Curve- Movement Analysis

• Bond yields rose to the highest since February 2016 after the minutes of the central bank’s policy meeting showed that a majority of the members of the monetary policy

panel turned hawkish at the February policy meet, even as they kept rates on hold.

• Rise in global crude oil prices also weighed on the bond market. Moreover, rise in yields was due to rise in 10- year U.S. treasury yields, volatility in oil prices and following

comments from Federal Reserve Chairman Jerome Powell that raised concerns of faster-than-expected hikes in U.S. interest rates.

• The 10-year bond yield ended the month at 7.68%, 28 bps higher than the previous month (7.40%).

6.10 6.30 6.50 6.70 6.90 7.10 7.30 7.50 7.70 7.90 8.10 3 months 6 months 1 year 2 year 3 year 4 year 5 year 6 year 7 year 8 year 10 year 28/02/2018 31/01/2018

In India ian Economy - Revie iew

Feb retail inflation eases to 4-month low of 4.44%, IIP grows 7.5% in Jan

IIP P ri rises to

• 7.5% in

n Ja Janu nuary, Nikkei Ind ndia man manufacturing PM PMI falls to

• 52.4 in

n Ja Janu nuary Who Wholesale inf nflation eases to

• 7-month low of
• f 2.

2.48% in n February; ; Re Retail inf nflation at 4-mth low of

• f 4.

4.44% on

• n che

heaper foo

• od, fue

uel

• 1.90%

5.70%

• 0.10%

3.30%

• 1.20%

3.75% 3.10% 1.70%

• 0.10%

0.90% 4.50% 3.80% 2.20% 8.40% 7.10% 7.50% 7.30% 3.98% 1.02%

• 1.4%
• 0.8%

0.2% 4.00% 4.70%

• 7.4%
• 1.20%
• 2.70%
• 1.70%
• 7.50%

0.60% 10.30% 4.00%

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 IIP PMI 6.6% 5.7% 3.9% 2.3% 0.9% 1.9% 3.2% 2.6% 3.6% 3.9% 3.6% 2.8% 2.5% 3.7% 3.9% 3.0% 2.2% 1.5% 3.4% 3.3% 3.6% 4.9% 5.2% 5.1% 4.4% 0% 2% 4% 6% 8% Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 WPI CPI

RBI Leaves Interest Rate Unchanged, Raises Inflation Forecast

• The six-member Monetary Policy Committee (MPC) of Reserve Bank of India, headed by Governor Urjit Patel; as widely expected kept repo rate unchanged at

6.0 per cent in its sixth bimonthly monetary policy meeting of FY18; citied concerns about the inflationary push by rising global crude oil prices. Consequently, MSF (Marginal Standing Facility Rate) and Bank rate remained unchanged at 6.25% each. Five on the six-member monetary policy committee voted for the decision, with one seeking a hike.

• The RBI raised its March quarter CPI inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year.
• However, RBI posits a revival in growth—projecting an acceleration in economic growth to 7.2% from a level of 6.6% in the current fiscal year. It premises this on

a host of factors including revival in investment demand and strengthening exports.

• Thus, in this policy while striking the balance between inflation and growth, RBI has given priority to growth at this juncture, which will now calm sentiments of

an otherwise nervous markets.

18.0 19.0 20.0 21.0 22.0 23.0 3.5 4.5 5.5 6.5 7.5 8.5 May-15 Aug-15 Dec-15 Apr-16 Aug-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 CRR % Repo % Rev Repo % SLR %(RHS)

Glo lobal & Currency Markets - Revie iew

Dollar index movement in the past 1 month

• The 10 year US-India bond yield spread has now been reducing since Dec 2017; the spread has reduced from 496 bps in Dec 2017 to 482 bps in Feb 2018.
• The 10 Year US-Germany spread have started to increase since August, due to stronger Eurozone data amid increasing political stability. The difference in the spread

is close to 220bps.

Indian Bond yields moved up above 7% since Nov17

88.0 88.5 89.0 89.5 90.0 90.5 91.0 01-Feb-18 04-Feb-18 07-Feb-18 10-Feb-18 13-Feb-18 16-Feb-18 19-Feb-18 22-Feb-18 25-Feb-18 28-Feb-18 DXY Index 4.0 5.0 6.0 7.0 8.0 9.0

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Feb16 Jun16 Oct16 Feb17 Jun17 Oct17 Feb18 Germany - 10 Year US - 10 Year India - 10 Year (RHS)

Emerging markets bond yields

10 Year Gsec Yield (% mth end) 2015 end 2016 end 2017 end Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 3m change in bps

Brazil 16.5 11.4 10.2 9.7 9.9 10.4 10.2 9.7 9.6

• 77

China 2.8 3.0 3.9 3.6 3.9 3.9 3.9 3.9 3.9

• 6

India 7.8 6.4 7.1 6.7 6.9 7.1 7.1 7.6 7.9 81 Indonesia 8.7 7.9 6.3 6.5 6.8 6.5 6.3 6.3 6.6 8 Korea 2.1 2.1 2.5 2.4 2.6 2.5 2.5 2.8 2.7 26 Malaysia 4.2 4.2 3.9 3.9 4.0 3.9 3.9 3.9 4.0 12 Philippines 3.9 4.6 5.7 4.6 4.8 5.7 5.7 6.2 6.7 103 Russia 9.6 8.4 7.6 7.6 7.6 7.6 7.6 7.2 7.0

• 58

South Africa 9.8 8.9 8.6 8.6 9.1 9.3 8.6 8.5 8.1

• 121

Taiwan 1.0 1.2 0.9 1.0 1.0 1.0 0.9 1.0 1.0 4 Thailand 2.5 2.6 2.4 2.3 2.4 2.4 2.4 2.4 2.4 4

• South Africa, Brazil

and Russia saw the sharpest fall in bond yields in last three months

• While, Philippines

and India saw the highest rise in bond yields in last three months

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

• Indian Bond markets (10-year G sec) continued to witness rise in yields due to rise in 10- year U.S. treasury yields, volatility in oil prices and

minutes of the February RBI policy review indicating a gradual hardening of views around inflation risks.

• The imposition of LTCG tax on equities and increased income tax exemption for senior citizens may attract more funds in the fixed income

space.

• Going ahead, we expect bond yields to be volatile in the short term given the uncertainty on future inflation reading, crude prices, fiscal deficit

target for next year, MSP policy adopted by government in 2018 and its resultant impact on food inflation amid global bond yields movement.

• Also, investment by FIIs and DIIs and the movement of rupee against the dollar will be closely tracked by bond markets.
• Accordingly, we continue to stay put in credit opportunities funds and also suggest to look at investment in short term bond funds with low

duration and having high credit quality papers.

Thank You

Email il: in investmentadvis isory@tatacapital.com

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