Fixed Income Market Update: March 2020 • The month was characterized by high volatility across various asset classes especially at the short end as year end redemption pressures for mutual funds and credit concerns were accentuated by the Novel COVID 19 outbreak across the world. The health calamity led to a never before kind of virtual lockdown in India announced by the PM on 24th March evening. SDL, Corporate Bond and CP spreads widened sharply. A series of extraordinary measures by RBI majority of which were announced at the end of an out of turn meeting on 27th March led to a sharp rally and fall in short term money market yields and gilt/AAA corporate bond yields. The actions also brought a semblance of normalcy to the market which had been further hit by WFH (work from Home) operational issues for the entire financial services industry leading to lower volumes and risk aversion.

At the out of turn RBI MPC review conclusion announced on 27th March, MPC reduced key repo rate by 75 bps and reverse repo rate by 90 bps and retained stance at “accommodative” with a 4-2 vote. CRR was cut by 1% from 4% to 3% injecting Rs 1,37,000 cr of liquidity into the banking system. The most significant measure was introduction was TLTROs of duration of 3 yrs for banks worth Rs 1 lakh crores to be deployed into buying CPs, NCDs, CDs from primary and secondary market and which can be considered in the HTM portfolio. Relaxation for daily CRR maintenance was also given to banks in view of WFH operational constraints. Prior to these announcements RBI also conducted an fx swap to inject dollar liquidity. RBI also conducted OMO gilt purchases worth Rs 40,000 cr to support gilt yields. 50,000 cr worth of LTROs announced earlier in February were also conducted.

Government mopped up extra Rs 63,000 cr through T bill auctions during the month and on the last day of March did a CMB auction worth Rs 80,000 cr of June 2020 maturity. This indicated the shortfall in govt revenues and thus a further slippage in the fiscal deficit from the RE of 3.8% for FY20. • India’s fiscal deficit for theApril-February 2020 period came in at `10.36-lakh crore, which is about 135.2% 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 new ten yr gilt benchmark closed the month at 6.14%, 23 bps lower than previous month. The ten yr AAA Corporate bond benchmark closed at 7.43%, flattish as compared to previous month. The five yr AAA corporate bond benchmark closed at 6.90%, 10 bps higher. • 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.

Brent Crude oil prices fell sharply to end the month at USD 22.74 per barrel. INR depreciated to 75.14 as compared to 72.18 in previous month. For the month of March, FPIs were net sellers in the debt market to the tune of Rs 55,839 cr, the highest net outflows in any month. 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 by 48 bps to 0.67 at end of Feb.

Feb CPI inflation released during the month came in at 6.6% as 7.59% in Jan.

Jan Industrial production (IIP) growth came at 2% as compared to -0.3% for previous month. • Banking System Liquidity remains ample. For the month of March the monthly average surplus was Rs 2,97,891 cr.

Towards the end of month government announced its borrowing calendar for the first half of the month. SDL and T bill calendars were also released. H1FY21 gross borrowings of the Centre through dated papers is placed at INR4.88 lakh cr (62.6% of FY21BE) while the net borrowings will be at INR3.5 lakh cr. The indicative calendar of market borrowings by the state governments for Q1 FY2021 has pegged the total market borrowing of 23 states at Rs. 1.27 lakh cr.

The Government has also sharply cut the small savings schemes rates by 70 bps to 140 bps post rate cut by RBI. This should aid in monetary transmission and reduction in bank deposit and lending rates in the coming two quarters. Outlook:

We expect Banking System liquidity to remain comfortable and in the range of 3 lakh crores approx .

We expect money market rates to overall remain range bound and benign. However buying interest maybe restricted only to high quality and PSU names. • The credit environment will remain fragile on uncertainty of revenues and cashflows due to the unprecedented nationwide lockdown.