Market Intelligence & Analytics RateView - CRISIL

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RateView

CRISIL’s outlook on near-term rates

November 2022

Research

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Analytical contacts

Bhoomika Dattani

Manager, Funds & Fixed Income Research [email protected]

Kalpi Gopani

Senior Research Analyst, Funds & Fixed Income Research [email protected]

Supriya Mahindrakar

Research Analyst, Funds & Fixed Income Research [email protected]

Rishav Agarwal

Management Trainee, Funds & Fixed Income Research [email protected]

Dharmakirti Joshi Chief Economist

[email protected]

Dipti Deshpande Principal Economist

[email protected]

Pankhuri Tandon Economist

[email protected]

The truncated first week of October started on a bearish note due to elevated United States (US) Treasury yields and crude oil prices following the decision of the Organization of the Petroleum Exporting Countries to cut output by a substantial 2 million barrels per day. The depreciating rupee and delayed timelines for inclusion of Indian bonds in JP Morgan’s global index also weighed on the yields. However, the market found support on Friday, post the G-sec auction result, with cut-offs coming better than expected.

In the second week, yields softened as crude oil prices fell on concerns over an impending global recession and also due to short covering. However, market participants remained on the corner ahead of domestic and US inflation prints, which eventually came in higher, keeping the yields elevated. The 10-year benchmark paper closed the week at 7.47%

In the third week, the 10-year benchmark G-sec continued to rise and closed up at 7.52%, driven by the higher overnight index swap rate, crude oil prices and US Treasury yields (which touched their highest since 2008). The hawkish tone in the minutes of meeting of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) also put upward pressure on yields, which were already high because of inflation worries.

Yields inched downwards in the last week of the month. The benchmark edged lower on the view that the Federal Reserve may slow the pace of rate hikes going forward. The 10-year benchmark paper closed the month at 7.45%, with subdued volumes, after it was announced that an off-cycle MPC meeting would be held on November 3.

Steady October

One-month view

Yields are likely to be impacted by a slew of factors in November, including crude oil prices, MPC minutes, inflation numbers, the Fed’s rate hike action, rupee-dollar dynamics, global interest rates, foreign portfolio investor (FPI) flows, geopolitical tensions, and more clarity on the inclusion of Indian bonds in global indices.

Three-month view

For the three months through January, yields are likely to be dictated by crude oil price movements, fiscal numbers, geopolitical tensions, the decisions of the Fed and the RBI on policy rates, as well as trends in India’s gross domestic product (GDP) growth, FPI flows, and inflation.

Framework for outlook

CRISIL provides its outlook on key benchmark rates for different debt classes, 10-year G-secs, state development loans (SDLs), and corporate bonds, based on statistical models and inputs from our in-house experts. It also incorporates our view on policy expectations, the

macroeconomic outlook, key events (local and global), and market factors (liquidity and demand/supply).

CRISIL’s outlook

Benchmark October 31, 2022 (A)

Novem- ber 30, 2022 (P)

January 31, 2023 (P) 10-year G-sec

yield*

7.45% 7.40% -

7.60% 7.50%- 7.70%

10-year SDL yield

7.77% 7.70%-

7.90% 7.90%- 8.00%

10-year corporate

bond yield

7.69% 7.70%-

7.90% 7.90%- 8.00%

A: Actual; F: Forecast

*7.26% GS 2032 is the 10-year G-sec benchmark

On interest rates

Source: CRISIL Research

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Economic parameter Our view Impact on yields Gross domestic

product (GDP) growth

• We expect India’s real GDP to grow 7.3% on-year in fiscal 2023 compared with 8.7% in the previous year. Risks are tilted to the downside

• Growth faces downside risk from the slowing global economy and elevated inflation. That said, growth will receive support from expansion in contact-based services and the government’s capex push

• GDP rose 13.5% on-year in the first quarter of fiscal 2023, aided by low base of last year, and catch-up in contact- based services

Consumer price index

(CPI) inflation • We expect CPI-linked inflation to rise to 6.8% on average in fiscal 2023, compared with 5.5% in the previous year

• Food is expected to drive the increase since supplies of major commodities remain tight. Elevated international commodity prices, coupled with a weakening rupee, will lead to some imported inflation. Producers are expected to increase passthrough of cost pressures to retail prices as demand improves

• CPI inflation increased to 7.4% on-year in September from 7.0% in the previous month

RBI’s monetary policy • We expect the RBI’s actions to be guided by domestic supply-demand pressures on inflation, the Fed’s actions, and evolving global financial conditions

• The MPC raised policy rates by 50 bps in its September meeting, bringing the repo rate to 5.90%. Cumulatively, the RBI has raised rates by 190 bps so far this fiscal

Fiscal health • The budget has targeted a reduction in the centre’s fiscal deficit to 6.4% of GDP in fiscal 2023 from 6.7%¹ the previous

• yearIn the first half of fiscal 2023, the fiscal deficit was 37.3% of the budgetary target compared with 35% in the same period last year. The higher deficit was primarily on account of relatively higher capex and lower tax receipts

Crude oil prices • CRISIL Research expects crude prices to average $98-103 per barrel in fiscal 2023 compared with $80 per barrel in the previous fiscal

• Brent crude rose to $93.1 per barrel in October, 3.3% higher on-month and 11.3% higher on-year

Factors influencing the outlook

1Provisional estimate

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Economic parameter Our view Impact on yields Current account

balance • We expect the current account deficit (CAD) to rise to 3.0%

of GDP in fiscal 2023 compared with 1.2% of GDP last year

• Slowing global GDP growth will weigh on India’s exports, while elevated international crude prices will push up import growth

• CAD rose to a 15-quarter high of 2.8% of GDP in first quarter of fiscal 2023, from 1.5% of GDP in the previous quarter

US Federal Reserve’s

stance • S&P Global expects the Fed policy rate to rise to 4.00-4.25%

by early 2023

• The Fed increased the policy rate by 75 bps to 3.75-4.00% in November. Cumulatively, the Fed rate has increased by 375 bps so far in 2022

Liquidity indicators - Demand & Supply

Supply side

• Uptick in primaries for commercial papers (CPs) and certificates of deposit (CDs) in anticipation of more rate hikes by the RBI

Demand side

• Demand for longer-end G-secs increased due to additional participation from pension funds and insurance players.

• Lower investor interest in corporate bond due to narrowed spread.

- Call rates/LAF (liquidity adjustment facility)

• Interbank call money rates remained below the RBI repo rate in October amid comfortable liquidity in the system.

The RBI intermittently conducted variable-rate reverse repo auctions during the month to drain out excess liquidity

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The yield on the 10-year benchmark G-sec hardened 6 bps on-month in October, closing at 7.45%. The yield on corporate bonds (10-year PSU FI) increased 4 bps to 7.69%, while that on SDLs rose 18 bps to close at 7.77%.

Note: 7.26% GS 2032 is the 10-year G-sec benchmark Source: CRISIL Research

10-year benchmark yields harden 10-year benchmark G-sec yield

The yield on the 10-year benchmark G-sec hardened by 6 bps on-month in October, closing at 7.45%. The yield on 10- -year Benchmark Bonds – HFC (Housing Development Finance Corporation Ltd.) decreased 2 bps to 7.98% as opposed to 8.00% in September. That on 10-year Benchmark Bonds – NBFC closed to 8.09%, a 2 bps increment over 8.07% in September.

Rupee depreciation and rise in oil prices on speculation of an OPEC output cut

Higher crude oil and

US treasury yields 11 bps easing following US Treasury movement on the view that the Federal Reserve may slow the pace of rate hikes moving ahead Fall in US treasury and

short covering

Rising crude with OPEC+ deciding to cut output by 2 million barrels per day

CPI reading of September coming in at 7.41%, higher than expectation

10 Year G-sec/SDL/CB

7.25%

7.30%

7.35%

7.40%

7.45%

7.50%

7.55%

03-OCT-22 04-OCT-22 05-OCT-22 06-OCT-22 07-OCT-22 08-OCT-22 09-OCT-22 10-OCT-22 11-OCT-22 12-OCT-22 13-OCT-22 14-OCT-22 15-OCT-22 16-OCT-22 17-OCT-22 18-OCT-22 19-OCT-22 20-OCT-22 21-OCT-22 22-OCT-22 23-OCT-22 24-OCT-22 25-OCT-22 26-OCT-22 27-OCT-22 28-OCT-22 29-OCT-22 30-OCT-22 31-OCT-22

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%

9.50%

10.00%

28-Apr-17 31-Oct-17 27-Apr-18 31-Oct-18 30-Apr-19 31-Oct-19 30-Apr-20 29-Oct-20 30-Apr-21 30-Oct-21 29-Apr-22 31-Oct-22

10-year G-sec 10-year SDL 10-year corporate bonds

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

31-10-21 30-11-21 31-12-21 31-01-22 28-02-22 31-03-22 30-04-22 31-05-22 30-06-22 31-07-22 30-08-22 30-09-22 31-10-22

10-year G-sec 10-year SDL

10-year corporate bonds(Nabard) 10-year Benchmark Bonds- HFC 10-year Benchmark Bonds- NBFC

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The spread of 10-year benchmark SDL over the benchmark G-sec widened by 12 bps over the past month, closing at a spread of 32 bps and retracing to a normal spread between the two. Meanwhile, a 10-year AAA-rated public-sector corporate bond spread narrowed by 2 bps to 24 bps on account of continued demand for prime corporate bonds in comparison with G-sec demand. The 12-month average spread for the 10-year benchmark SDL and corporate bond over the G-sec were 37 bps and 32 bps, respectively.

widened for SDLs

The 10-year US Treasury (UST) yield closed at 4.10% in October, 27 bps higher than the September close of 3.83%, driven by the Fed’s hawkish stance, aggressive rate hikes and its target of controlling inflation.

The monthly average spread between the domestic 10-year benchmark G-sec yield and the 10-year UST yield narrowed to 3.47% from 3.75%.

Spread over US Treasury narrowed

Term premium between 10-year benchmark G-sec and TREPS narrows

The average spread between the 10-year benchmark G-sec yield and the tri-party repo (TREPS) narrowed to ~141s bps in October from ~184 bps in September. The 12-month average spread stood at ~280 bps.

Term premium (10-year G-sec benchmark and TREPS)

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

28-Oct-16 28-Apr-17 31-Oct-17 27-Apr-18 31-Oct-18 30-Apr-19 31-Oct-19 30-Apr-20 29-Oct-20 30-Apr-21 30-Oct-21 29-Apr-22 31-Oct-22

SDL spreads Corporate bond spreads

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

31-Oct-2020 30-Apr-2021 31-Oct-2021 30-Apr-2022 31-Oct-2022

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

31-Oct-21 30-Nov-21 31-Dec-21 31-Jan-22 28-Feb-22 31-Mar-22 30-Apr-22 31-May-22 30-Jun-22 31-Jul-22 31-Aug-22 30-Sep-22 31-Oct-22

INR 10-year G-sec 10-year US Treasury Spread (R.H.S.)

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Average trading volume decreased across securities, barring SDL

Trading volume of G-secs and Treasury bills (T-bills) decreased ~2% and ~38%, respectively, while those of SDLs increased

~16%. Trading volume of CPs decreased

~16%, while that of CDs and corporate bonds decreased ~50% and ~32%,

respectively. However primary market were more active for CDs and CPs.

Average systemic liquidity fell to ~Rs 0.07 lakh crore in October from ~Rs 0.72 lakh crore the previous month. Daily surplus liquidity reached a high of ~Rs 1.17 lakh crore during the month. Average surplus for the past 12 months stood at ~Rs 4.26 lakh crore. Continuous credit offtake led to absorption of surplus liquidity from the market as steps were taken to curb inflation. Systemic liquidity at October-end was at ~Rs (0.20) lakh crore, mainly post the RBI’s intervention in the forex market and higher demand for credit, which has resulted in less cash surplus with banks.

Monthly average trading volume (Rs crore)

Net liquidity injected [injection (+)/absorption (-)]* (Rs crore)

Change in benchmark spreads over G-sec

Spreads over G-sec*

Rating

category Date PSUs/

corporates NBFCs Housing finance companies

AAA 30-Sep-22 0.10% 0.45% 0.34%

31-Oct-22 0.09% 0.44% 0.43%

AA+ 30-Sep-22 0.42% 0.93% 0.78%

31-Oct-22 0.46% 0.93% 0.87%

AA 30-Sep-22 0.83% 1.77% 1.68%

31-Oct-22 0.84% 1.81% 1.71%

AA- 30-Sep-22 1.67% 2.76% 2.69%

31-Oct-22 1.69% 2.83% 2.67%

Note: *Spreads are for five-year securities over annualised G-sec yield *Selection of repre- sentative issuers have been re-evaluated as per periodic review.

*Net liquidity is calculated as repo + MSF + standing liquidity facility - reverse repo Source: CRISIL Research

-1,000,000.00-900,000.00-800,000.00-700,000.00-600,000.00-500,000.00-400,000.00-300,000.00-200,000.00-100,000.00100,000.00200,000.00300,000.00400,000.000.00

Net liquidity injected [injection (+)/absorption (-)] *

10,000.00 20,000.00 30,000.00 40,000.00 50,000.00

0.00 1,000.00 2,000.00 3,000.00 4,000.00 5,000.00 6,000.00 7,000.00 8,000.00 9,000.00

Aug-22 Sep-22 Oct-22 12 Month- Avg

SDL TBILL CD

CP Corporate Bond G-sec (R.H.S.)

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Net FPI outflow in October was Rs 3,080 crore compared with a net inflow of Rs 3,955 crore in September. There was a Rs 3532 crore outflow in the debt market after JPMorgan Chase & Co refrained from including the debt in its gauge. Equity saw outflows of Rs 8 crore.

FPI net investments in Debt (Rs Crore)

Key downgrades and upgrades

Downgrades

Issuer name Old rating New rating

IFCI Ltd. BWR BB BWR B+

Capital Trust Ltd. CARE BBB- CARE BB+

IFCI Venture Capital Funds Ltd. BWR BB+ BWR B+

Digikredit Finance Pvt. Ltd. CRISIL BB+ CRISIL B+

Energy Efficiency Services Ltd. [ICRA]A+ [ICRA]A

Upgrades

Issuer name Old rating New rating

SBFC Finance Pvt. Ltd. [ICRA]A [ICRA]A+

Transmission Corporation Of Andhra Pradesh Ltd. CRISIL D CRISIL C

Yes Bank Ltd. CARE BBB+ CARE A-

JK Paper Ltd. CRISIL AA- CRISIL AA

Muthoot Fincorp Ltd. CRISIL A- CRISIL A

Muthoot Microfin Ltd. CRISIL A CRISIL A+

Muthoot Capital Services Ltd. CRISIL A CRISIL A+

Kribhco Fertilizers Ltd. CRISIL AA- CRISIL AA

(2,476) 3,958

1,641

(1,806) 4,079

(2,518) (6,488)

(6,492) (118)

(1,706) (4,829)

(782) 12,144

12,804

(1,558) 983

(11,799) 5,194

(3,073) (5,632)(4,439)

(5,506) (1,414)

(2,056) 3,845

4,012

(3,532)

-15000 -10000 -5000 0 5000 10000 15000 20000

Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22

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Analyst Disclosure

Members of the team (including their relatives) involved in the preparation of this report and whose names are published as part of this report hereby affirm that there exists no conflict of interest (including any financial interest or actual/ beneficial ownership of 1% or more of the securities of the subject companies) that can bias the output of the Report. Further, neither the members have served as officers, directors, or employees of the companies analyzed in the report in the last 6 months nor have they engaged in market making activities for the subject companies.

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1. CRISIL Research or its associates do not provide investment banking or merchant banking or brokerage or market making services.

2. CRISIL Research encourages independence in research report preparation and strives to minimize conflict in preparation of research reports through strong governance architecture comprising of policies, procedures, and disclosures.

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Market Intelligence & Analytics RateView - CRISIL

RateView

CRISIL’s outlook on near-term rates

November 2022

Research

Analytical contacts

Contents

Steady October

One-month view

Three-month view

Framework for outlook

CRISIL’s outlook

On interest rates

Factors influencing the outlook

10-year benchmark yields harden 10-year benchmark G-sec yield

widened for SDLs

Spread over US Treasury narrowed

Term premium between 10-year benchmark G-sec and TREPS narrows

Average trading volume decreased across securities, barring SDL

Change in benchmark spreads over G-sec

Key downgrades and upgrades