Fixed Income Market Update: February 2020

During the month we saw mixed performance across asset classes.3 month to 1 yr CD yields rose as issuance increased. T bill, gilt yields and corporate bond yields fell sharply on back of no extra borrowing announcement in Budget, RBI’s LTRO operations, sharp fall in crude oil prices and fall in global bond yields as fears of recession due to Coronavirus infections led to flight to safety. • At the RBI MPC review conclusion announced on 6th Feb, MPC kept key repo and reverse repo rates unchanged and retained stance at “accommodative” with a 6-0 vote. Inflation forecast for H1:2020-21 has been revised upwards by nearly 140 bps (earlier was 4.0-3.8) and now (5.4-5.5). The real GDP growth forecast on the other hand has been revised downwards to 5.5% – 6.00% in H1:2020-21 from 5.9%-6.3% earlier.The most significant statement in the policy was that policy recognizes that “ there is policy space available for future rate action” and that “persevere with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target”.

In the Statement on developmental and regulatory policies, the most important announcement was Long Term Repo Operations for improving monetary transmission. The LTROs of 1 yr and 3 yr maturity worth Rs 1 lakh crores would be available at the repo rate. During the month RBI conducted 2 LTROs of Rs 25000 cr each with maturity of 3yr and 1 yr. For the month of March balance Rs 50,000 cr worth of LTRO for maturity of 3 yr is scheduled.

India’s fiscal deficit for the April-January 2020 period came in at `9.85-lakh crore, which is about 128 per cent of the Revised fiscal year 2019-20 target of `7.67- 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 totaling Rs 60,000 cr worth maturing in March 2020. • The new ten yr gilt benchmark closed the month at 6.37%,23 bps lower than previous month.The ten yr AAA Corporate bond benchmark closed at 7.43%, 40 bps lower than previous month. The five yr AAA corporate bond benchmark closed at 6.80%, 35 bps lower as55-65 bps on an average to the new ten yr gilt benchmark and witnessed good demand since the central govt borrowing programme got over previous month.

1 year CD rates rose to close at 6.17, 22 bps lower than previous month. 1 yr T bill yield closed at 5.13%, 14 bps lower than previous month. 3 month CD rates closed at 5.64, 14 bps higher than previous month.

BrentCrude oil prices fell sharply to end the month at USD 50.02 per barrel.INR depreciated mildly to 72.18 as compared to Rs 71.36 in previous month. For the month of February, FPIs were net buyers in the debt market to the tune of Rs 315 cr. India’s Jan trade deficit came in sharply higher at USD 15.17 bn, compared to USD 11.25 bn in previous month. 10 yr US treasury yields fell sharply from 1.51 at end of dec to 1.15 at end of Jan. 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 confirmed cases reported in Europe and other countries around the world.

Jan CPI inflation released during the month came in at 7.59% as compared to 7.35% in December.WPI for Jan came in at 3.1% as compared to 2.59% in previous month.

Dec Industrial production (IIP) growth came at -0.3% compared to 1.8% for previous month.

Banking System Liquidity remains ample. For the month of February the monthly average surplus was Rs 2,95,629 cr. Outlook:

We expect Banking System liquidity to sharply come down to neutral levels on back of large advance tax outflows.

We expect money market rates to overall remain range bound but there may be intermittent spiked due to the tighter liquidity conditions.

Lack of supply and overall fall in global bond yields would keep gilt prices supported in March.

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