Debt Market Update - June 2017

 

The yield on new 10-year benchmark (6.79% GoI 2027) ended the month of June at 6.51% down by 15 bps over the previous month end. The yield on 10-year AAA Corporate Bond ended the month at 7.42% as against 7.64% at the end of May 2017. Thus, corporate bond spreads during the month narrowed to 80 bps as against 87 bps in the previous month.

Liquidity conditions continued to remain positive during the month of June 2017. As against ~Rs. 340,058 crs of average liquidity absorbed by RBI during the month of May 2017 through various sources (Liquidity Adjustment Facility, export refinance, marginal standing facility and term repos/reverse repos), ~Rs.309,030 crs of liquidity was absorbed by RBI during the month of June 2017. Cash Management Bills (CMBs) were issued twice during June totaling Rs.60,000 crs. On 30th June, RBI announced an Open Market Operation (OMO) sale of G-secs totaling Rs.10,000 crs. The overnight rate ended at the same level of 6.25% as against previous month.

INR closed at 64.58 versus the USD in June as against 64.51 in May 2017. The net FII investments in equities & debt were ~US$ 4.55 billion in June 2017, up from US$ 4.17 billion in May 2017. FII's have purchased close to US$ 22.65 billion in Indian debt and equity markets between Jan'17 to Jun'17 as compared to ~US$ 1.2 bn during Jan'16 to Jun'16.

The annual rate of retail inflation, CPI fell to 2.2% YoY in May 2017, lower than 3.0% in April 2017. The drop was largely on account of fall in food inflation, which decreased to -0.22% in May 2017 from 1.2% in April 2017. Fuel & light inflation also decreased to 5.46% in May 2017 from 6.13% in April 2017. Core CPI (excl. food & fuel) also declined to 4.14% in May 2017 from 4.4% in April 2017.

On the economic front, Gross Value Added (GVA) grew 6.1% YOY in 4QFY17 partly reflecting impact of demonetization. FY17 GVA growth was at 6.6%, lower than FY16 GVA growth of 7.9%.

In its June meeting, the Monetary Policy Committee (MPC) voted 5-1 in favour of leaving the policy repo rate unchanged at 6.25% in line with consensus expectations. The RBI sharply lowered its inflation projections for first half of FY18 to 2.0%-3.5% (from 4- 4.5% earlier) and for second half of FY18 to 3.5%-4.5% (from 4.5-5% earlier). It also lowered its FY18 GVA growth projection marginally to 7.3% from its 7.4% projection made during the April policy meeting.

Outlook

The MPC in its June'17 credit policy review kept policy repo rate unchanged with a less hawkish tone and sharply lowered inflation projections for the current fiscal year. In case the incoming data reaffirms the moderating path of inflation, it may create some space for easing in our opinion. With a benign inflation outlook, steady INR, implementation of GST and good progress of monsoon, there is room for moderate downside in yields in our view.

Source for various data points: RBI Website, Bloomberg, Reuters and HDFC AMC Research.

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