Fixed Income Market Update: January 2020 • During the month we saw mixed performance across asset classes. T bill yields rose on back of supply due to CMB issuance. CD yields were stable on back of ample banking system liquidity. Long term corporate bond yields rose due to supply in the 10 year segment while short term gilt yields rose as well.

Union Budget was released on 1st Feb.RE (Revised Estimates) for FY 20 Fiscal deficit is at 3.8% as compared to BE (Budgeted Estimate) of 3.3% and for FY 21 it was pegged at 3.5%. For the debt market there was a positive relief as no extra borrowing was announced for remaining period of FY 2020. For FY 2021, the Gross borrowing is pegged at Rs 7.8 lakh crore which excludes Rs 30,000 cr of proposed buyback and net borrowing at Rs 5.44 lakh crores. It is estimated the Government will conduct switches/conversion to the tune of Rs 2.7 lakh crores next year.

During the month, RBI conducted switch operations by offering to sell 2020 and 2021 gilts and buy the ten year benchmark gilt and other medium term gilts by way of two auctions. Cumulatively Rs 20000 cr was bought back and Rs 12950 cr of 2020/21 gilts were sold. This led to a net liquidity injection of Rs 7050 cr.

During the month GoI also conducted switch operations by buying back 2020 maturing securities and issuing longer dated securities with RBI worth Rs 41,920 cr FV.Subsequently GoI also did conversion with the market by buying back 2020 securities and issuing ten yr benchmark and 2024 securities. This amount was approx. Rs 13,260 cr.

India’s fiscal deficit for the April-December 2019 period came in at `9.31-lakh crore, which is about 132 per cent of the fiscal year 2019-20 target of `7.04- lakh crore, reflecting lower than budgeted tax revenue collections and front loaded govt expenditure. The tight liquidity position of the government was also evidenced by the CMB issuance totalling Rs 90,000 cr worth (including the Rs 30,000 cr worth announced in Dec and pay out in January). This CMB issuance was main reason for the slight uptick in short term T bills as it added to overall T bill supply.

The new ten yr gilt benchmark closed the month at 6.56%, same level as previous month. The ten yr AAA Corporate bond benchmark closed at 7.81%, 18 bps higher than previous month.The five yr AAA corporate bond benchmark closed at 7.14%, 3 bps lower as compared to previous month.Ten yr SDL spreads were stable in a range of 60-65 bps on an average to the new ten yr gilt benchmark as actual supply was lower than the scheduled calendar amount.

1 year CD rates marginally fell to close at 5.94, 8 bps lower than previous month. 1 yr T bill yield closed at 5.26%, 7 bps higher than previous month. 3 month CD rates closed at 5.53, 18 bps higher than previous month.

Brent Crude oil prices fell sharply to end the month at USD 57.97 per barrel. INR depreciated mildly to 71.49 as compared Rs 71.38 in previous month. For the month of January, FPIs were net sellers in the debt market to the tune of Rs 11,546 cr. India’s Dec trade deficit came in at USD 11.25 bn, compared to USD 12.12 bn in previous month. 10 yr US treasury yields fell sharply from 1.92 at end of dec to 1.59. All these movements in oil, rupee, global bond yields and FPI action was due to risk off and flight to safety and growing fears of further global growth slowdown due to detection of Coronavirus in China and resultant curbs on travel, spending and thousands of Chinese being infected.

Dec CPI inflation released during the month came in at 7.35% as compared to 5.54% in October.WPI for Dec came in at 2.59% as compared to 0.58% in previous month.

Nov Industrial production (IIP) growth came at 1.8% compared to -4.0% for previous month. • Banking System Liquidity remains ample. For the month of January the monthly average surplus was Rs 3,16,579 cr. Outlook:

We expect Banking System liquidity to continue to remain comfortably in surplus mode

We expect money market rates to overall remain range bound

Further CMB issuances may put slight upward pressure on near term t bill yields

We expect RBI MPC to keep key rates unchanged at upcoming Monetary Policy Review scheduled on 6th Feb and retain stance at accommodative