Fixed Income Market Update: June 2020

During the month short term money market, corporate bond and short term gilt yields fell. Ample banking system liquidity, low supply and demand due to inflows in MF debt schemes were the main reasons. 1 yr money market and tbill lvls rose slightly as did ten yr gilt yield. Lack of any OMO announcement was a reason for yields rising in the long end.

India’s fiscal deficit for the first two months of the fiscal year 2020-21 has come in at around 4.66 lakh crore, as per the report released by the Centre. This means that within the first two months of FY21, the fiscal deficit numbers have hit nearly 59 percent of the total budgeted target for the current fiscal.

The new ten yr gilt benchmark rose by 12 bps to end at 5.88% towards the end of the month. The 5 yr gilt benchmark fell 14 bps to end the month at 5.28%.

RBI released the States borrowing calendar for the July to Sept quarter. The total gross amount is expected to be about Rs 1.78 lakh cr as compared to actual borrowing done by the States to the tune of Rs 1.55 lakh cr during April to June 2020.

Corporate bonds yields fell during the month.The 5 yr AAA benchmark and the 10 yr AAA benchmark ended the month at 6.16% and 7.05% respectively compared to 6.37% and 7.28% in the previous month.

1 year CD rates closed at 4.05% compared to 3.99% in the previous month. 3 month CD rates fell further to close at 3.25%, compared to 3.76% in previous month.

Brent Crude oil prices further rose during the month on signs of upturn in economic activity from USD 36.63 per barrel to USD 40.89 per barrel. INR slightly appreciated to 75.50 during the month. For the month of June, FPIs were net sellers in the debt market to the tune of Rs 2256 cr.

India’s May trade deficit contracted sharply to USD 3.15 bn, compared to USD 6.76 bn in previous month. 10 yr US treasury yields rose marginally to 0.66% as compared to 0.65% at end of May.

For the month of May, CPI inflation was again not released due to difficulties around data gathering in the current lockdown.

April Industrial production (IIP) growth came at -55.5% as compared to -18.3% for previous month reflecting nationwide lockdown situation.

Banking System Liquidity remains ample. For the month of June the monthly average surplus was Rs 3.77 lakh cr. Outlook:

We expect Banking System liquidity to remain comfortable in the range of Rs 3 to 4 lakh crores for the month of july. Short term CD and CP rates and overnight rates should remain stable and low as was prevalent in June.

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. Index 1 Month (%) 3 Months (%) 6 Months (%) 1 Year (%)

Broad Indices Nifty 50 10302 7.53 19.82 -15.34 -12.61

S&P BSE Sensex 34916 7.68 18.49 -15.36 -11.37

S&P BSE 100 10411 7.35 20.09 -14.92 -12.59

S&P BSE 200 4356 7.82 20.68 -14.22 -11.58

S&P BSE 500 13438 8.24 21.08 -14.23 -12.12

S&P BSE MID CAP 13055 10.23 23.51 -12.78 -11.84

S&P BSE SMALL CAP 12381 13.66 28.85 -9.63 -13.05

Performance As on June 30, 2020*

Index 1 Month (%) 3 Months (%) 6 Months (%) 1 Year (%) Sectoral Indices

S&P BSE AUTO 15275 8.38 42.15 -17.36 -14.68

S&P BSE Bankex 24294 9.75 10.18 -33.75 -30.53

S&P BSE CD 20338 7.23 5.04 -18.68 -22.16

S&P BSE CG 12859 4.26 17.12 -24.11 -35.24

S&P BSE FMCG 11258 3.31 9.78 -1.29 -0.91

S&P BSE HC 16263 3.94 33.87 21.10 26.17

S&P BSE METAL 7210 5.95 26.20 -30.86 -35.09

S&P BSE Oil & Gas 12668 7.03 26.42 -14.08 -14.42

S&P BSE PSU 4882 8.54 9.47 -29.81 -37.66

S&P BSE Teck 7569 4.80 18.21 -1.92 -1.37

*Performance for less than one year a