Fixed Income Market Update: May 2020

During the month yields fell across gilts, high quality corporate bonds and short term money market instruments on the back of ample banking system liquidity, further measures undertaken by RBI including repo and reverse repo rate cut and gilt/tbill purchases and expectations of continued support for addressing the COVID 19 related economic slowdown.

In yet another out of turn MPC meeting concluded on 22nd May,RBI announced 40 bps cut in repo and reverse repo rate to 4% and 3.35% respectively while maintain accommodative stance. The decision was 5-1 in backdrop of the more than expected severe impact on economic activity due to the COVID 19 pandemic and resultant lockdown. Other measures included extending deadlines on moratorium of loans, relaxing group exposure limits, allowing further leeway to state governments from the consolidated sinking fund to help them meet their redemptions, extending the refinance facility of SIDBI and other measures to support exports and imports.

A total stimulus package of Rs 20.97 lakh cr as per official govt data has been announced which include earlier RBI measures and govt stimulus measures. The fiscal impact of the same seems to have been considered while announcing the revised gross dated gsecs borrowing programme. Balance measures are in the form of loan, credit guarantee and working capital requirements.

GDP data released for the quarter Jan to March 2020 showed growth at 3.1%. GDP growth rates for the previous 3 quarters were also revised down. It is expected that once full data is available the GDP print maybe revised further downwards.

Fiscal data released for the month of March 2020 showed fiscal deficit estimate to have sharply jumped to 4.6% from a revised estimate of 3.8% on the back of gap in total receipts of close to Rs 2 lakh crores and slowdown in nominal GDP growth.

A new ten yr gilt benchmark was announced during the month. It closed the month at 5.76% having been issued at 5.79% initially. The 5 yr gilt benchmark closed at 5.42% compared to 5.72% in previous month.

1 year CD rates closed at 3.99% compared to 4.79% in the previous month.3 month CD rates closed at 3.76%, compared to 4.60% in previous month.

Brent Crude oil prices rose during the month on signs of upturn in economic activity from USD 23.7 per barrel to USD 36.63 per barrel. INR depreciated to 75.66 as compared to 75.11 in previous month. For the month of May, FPIs were net sellers in the debt market to the tune of Rs 18,988cr. India’s April trade deficit contracted sharply to USD 6.76 bn, compared to USD 9.76 bn in previous month. 10 yr US treasury yields rose marginally to 0.65% as compared to 0.64% at end of April.

For the month of April, CPI and WPI inflation were not released due to difficulties around data gathering in the current lockdown.

March Industrial production (IIP) growth came at -16.7% as compared to 4.62% for previous month.

Banking System Liquidity remains ample. For the month of May the monthly average surplus was Rs 5,08,845 cr. Outlook:

We expect Banking System liquidity to remain comfortable in the range of approx Rs 4 to 5 lakh crores for the month of June. Short term CD and CP rates and overnight rates may remain stable and low as was prevalent in May.

While fiscal worries remain on anticipated stimulus measures and slowdown in tax revenues, RBI measures should act as a counterbalancing force and keep gilt prices at short to medium end supported.

The credit environment will remain fragile on uncertainty of revenues and cashflows due to the unprecedented nationwide lockdown.