Fixed Income Market Update: April 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 a reverse repo rate cut and gilt/tbill purchases and expectations of continued support for addressing the COVID 19 related economic slowdown. Lower rated higher credit risk corporate bonds remained under pressure with rising spreads due to selling by mutual funds on the back of redemptions and announcement of closure of six schemes by a large mutual fund during the month.

On 17th April, RBI Governor today came out with further set of measures to alleviate stress in financial markets. The key measures announced were: 1) Reduction in Reverse Repo rate by 25 bps to 3.75%. (2) TLTROs 2.0. In the second version worth Rs 50,000 cr the facility would be specifically targeted at mid-sized and small sized NBCFs and MFIs. (3) WMA (Ways and Means Advances) limit for States has been increased by 60% over their March end limits. This is to ensure they don’t bunch up their SDL borrowings during the first quarter. Further during the month RBI conducted stealth purchases of T bills and other short dated bills worth Rs 61,075 cr possibly through primary auctions. This helped to keep T bills at stable levels inspite of an announcement of increase in govt’s t-bill borrowings for the April to June quarter from Rs 3 lakh crores to Rs 4.5 lakh cr. Apart from this, RBI also revised the WMA (Ways and Means advances) for the government to Rs 2 lakh crores to tide over the temporary mismatch in cashflows due to the COVID pandemic.

The first auction under TLTRO 2.0 for an amount of Rs 25,000 cr was held on 23rd April 2020 and it was undersubscribed.Bids worth Rs 12,850 cr were accepted.

Towards the end of the month, RBI also announced Special OMO worth Rs 10,000 cr whereby RBI sold short dated CMBs and T bills and bought longer dated 6 to 10 yr government securities. The auction was fully subscribed.

RBI also announced a SLF (Standing Liquidity Facility) worth Rs 50,000 cr for MFs post the announcement of closure of six schemes by a large fund house. This was in anticipation of redemptions that the fund industry may face. The line can be availed by banks to provide loans or buy assets from mutual funds.

The new ten yr gilt benchmark closed the month at 6.11%, 3 bps lower than previous month. The 5 yr gilt benchmark closed at 5.15% compared to 5.58% in previous month.

1 year CD rates closed at 5.20% compared to 5.60% in the previous month. 3 month CD rates closed at 4.30%, compared to 4.55% in previous month.

Brent Crude oil prices remained stable at around USD 25 per barrel.INR appreciated to 75.11 as compared to 75.66 in previous month. For the month of April, FPIs were net sellers in the debt market to the tune of Rs 12,483 cr. India’s March trade deficit came in at USD 9.76 bn, compared to USD 9.85 bn in previous month. 10 yr US treasury yields fell to 0.61 as compared to 0.69 at end of March.

March CPI inflation released during the month came in at 5.91% as 6.58% in Feb. • Feb Industrial production (IIP) growth came at4.5% as comparedto 2%forpreviousmonth. HoweverIndiaAprilmanufacturing PMI hit an all time low of 27.4 mainly as a result of the coronavirus led shutdown. The Services PMI was far worse coming in at 5.4 for April compared to 49.3 in April. Thus the Composite PMI for April stands at 7.2 compared to 50.6.

Banking System Liquidity remains ample. For the month of April the monthly average surplus was Rs 4,67,264 cr. Outlook:

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

While fiscal worries remain on anticipated stimulus measures and slowdown in tax revenues, RBI measures are expected to 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.