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CRISIL’s outlook on near-term rates
October 2022
Research
Analytical contacts
Yakshit Goda
Manager, Funds & Fixed Income Research [email protected]
Govinda Punjabi
Senior Research Analyst, Funds & Fixed Income Research [email protected]
Yadnesh Tari
Research Analyst, Funds & Fixed Income Research [email protected]
Parth Raval
Management Trainee, Funds & Fixed Income Research [email protected]
Dharmakirti Joshi Chief Economist
Dipti Deshpande Principal Economist
Pankhuri Tandon Economist
Contents
Stormy September 3
Factors influencing the outlook 4
September at a glance 6
The yield on the 10-year benchmark government security (G-sec; 6.54% GS 2032) opened the month at 7.21% and closed at 7.43%, outside CRISIL’s forecast range of 7.20-7.40% and up 24 basis points (bps) from the August close of 7.19%. The newly assigned 10-year benchmark (7.26% GS 2032) closed the month at 7.39%.
The opening week started with a slight hardening in yields owing to profit booking and an increase in global crude oil prices. However, domestic yields softened as crude oil prices started descending from the month’s peak, complemented by a decrease in overnight index swap (OIS) rates. The week ended on a bearish note, tracking an increase in US treasury yields and global crude oil prices.
The bearish note persisted in the second week as a higher-than-expected US inflation print acted on the US Treasury yields. However, domestic yields witnessed some softening due to positive sentiment as the domestic inflation print for August came in line with market expectations. The buzz around inclusion of Indian bonds on global bond indices also kept sentiment upbeat. Fears of a sharp rate hike in upcoming US Federal Reserve (Fed) policy meet and an increase in OIS rates weighed on yields, pushing the 10-year benchmark paper to close even weaker at 7.26%.
In the third week, bonds traded largely with a negative bias due to a sharp rise in US treasury yields as the Federal Open Market Committee (FOMC) hiked the key policy rate by 75 bps and its commentary indicated more rate hikes to control inflation. Towards the end, a decrease in Brent crude oil prices and better-than-expected G-sec auction cut- offs lifted market sentiment and yields. The 10-year benchmark paper closed the week at 7.38%.
The last week of the month saw yields surge and the benchmark hit 7.39% as the rupee depreciated sharply against the US dollar (USD), crossing Rs 81/USD mark. Volume stayed subdued ahead of the release of the G-sec borrowing calendar and the monetary policy review meeting. The Monetary Policy Committee (MPC) decided to hike the repo rate by 50 bps, in line with market expectations. However, higher auction cut-offs weighed on yields and the week ended on a bearish note with 10-year benchmark paper closing at 7.39%.
Stormy September
One-month view
Yields are likely to be impacted by a slew of factors in October, including crude oil prices, the effect of MPC’s rate hike, 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 December, yields are likely to be dictated by crude oil price movements, geopolitical tensions, the decisions of FOMC and the Reserve Bank of India (RBI) on policy rates, as well as trends in India’s gross domestic product (GDP) growth, FPI flows and inflation numbers.
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).
Note: All levels quoted are volume-weighted average yields during the last trading hour of the day
CRISIL’s outlook
Benchmark Septem- ber 30, 2022 (A)
October 31, 2022 (P)
Decem- ber 31, 2022 (P) 10-year G-sec
yield*
7.39% 7.40% -
7.60% 7.45%- 7.65%
10-year SDL yield
7.59% 7.70%-
7.90% 7.80%- 8.00%
10-year corporate
bond yield
7.65% 7.75%-
7.95% 7.80%- 8.00%
A: Actual; F: Forecast
*7.26% GS 2032 is the 10-year G-sec benchmark
On interest rates
Source: CRISIL Research
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% previous year. Risks are tilted to downside.
• Downside risks to growth prevail on account of slowing global growth and elevated inflation. That said, growth will receive support from improving growth in contact-based services and government’s capex push.
• GDP grew 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 consumer price index (CPI)-linked inflation rise to 6.8% average in fiscal 2023 compared with 5.5% in previ- ous year.
• Food is expected to drive the rise in inflation as supplies of major commodities remain tight. Elevated internation- al commodity prices, coupled with 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 7.0% on-year in August from 6.7%
previous month.
RBI’s monetary policy • We expect the RBI’s actions to be guided by domestic sup- ply-demand pressures on inflation, and US Federal Re- serve’s actions, and evolving global financial conditions
• The MPC raised policy rates by 50 bps in September meet- ing, bringing repo rate to 5.90%. Cumulatively, the RBI has raised rates by 190 bps in fiscal 2023 so far.
Fiscal health • The budget has targeted a reduction in centre’s fiscal deficit to 6.4% of GDP in fiscal 2023 from 6.7%1 previous year.
• In the first 5 months of current fiscal year, central
government’s fiscal deficit came at 32.6% of the budgeted target, marginally higher than 31.1% in corresponding period last year. While revenues faltered, capex continued to rise in August.
Crude oil prices • CRISIL Research expects crude prices to average $98-103 per barrel in fiscal 2023 compared with $80 per barrel last year.
• Brent crude oil prices averaged $90.2 per barrel in August, 8.6% lower on-month but 20.9% higher on-year.
Factors influencing the outlook
1Provisional estimate
Economic parameter Our view Impact on yields Current account
balance • We expect 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 commodity 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 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 policy rate by 75 bps to 3.00-3.25%
in September policy meeting. Cumulatively, fed rate has increased by 300 bps in 2022 so far.
Liquidity indicators - Demand & Supply
Supply side
• New 10-year G-sec auctioned in August 2022 at a cut-off of 7.26%,is now the latest 10 year benchmark.
• Uptick in primaries for commercial papers (CPs) and certificates of deposit (CDs) in anticipation of more rate hikes by RBI.
Demand side
• Demand for G-secs and SDLs increased due to limited supply of corporate bonds
- Call rates/LAF (liquidity adjustment facility)
• Interbank call money rates remained below the RBI repo rate in September amid ample liquidity in the system.
The RBI sporadically conducted variable rate reverse repo (VRRR) auctions during the month to suck out excess liquidity
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
10-year G-sec 10-year SDL 10-year Benchmark Bonds- HFC
10-year Benchmark Bonds – HFC hardens
6.95%
7.00%
7.05%
7.10%
7.15%
7.20%
7.25%
7.30%
7.35%
7.40%
7.45%
31-AUG-22 01-SEP-22 02-SEP-22 03-SEP-22 04-SEP-22 05-SEP-22 06-SEP-22 07-SEP-22 08-SEP-22 09-SEP-22 10-SEP-22 11-SEP-22 12-SEP-22 13-SEP-22 14-SEP-22 15-SEP-22 16-SEP-22 17-SEP-22 18-SEP-22 19-SEP-22 20-SEP-22 21-SEP-22 22-SEP-22 23-SEP-22 24-SEP-22 25-SEP-22 26-SEP-22 27-SEP-22 28-SEP-22 29-SEP-22 30-SEP-22
The yield on the 10-year benchmark G-sec hardened by 20 bps on-month in September, closing at 7.39%. The yield on corporate bonds (10-year PSU FI) increased 20 bps to 7.65%, while that on SDLs rose 8 bps to close at 7.59%.
Note: 7.26% GS 2032 is the 10-year G-sec benchmark Source: CRISIL Research
Source: CRISIL Research
September at a glance
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 20 bps on-month in September, closing at 7.39%. The yield on 10- year Benchmark Bonds – HFC (Housing Development Finance Corporation Ltd.) increased by 20 bps to 8.00% as opposed to 7.80% in the month of August 2022, while that on SDLs rose 8 bps to close at 7.59%.
Brent crude at month’s high ~$94.5/bbl
Fed raises rates by 75 bps to fight inflation
RBI hiked repo rate by 50 bps
Inclusion of Indian bonds in global indices delayed further US CPI print higher than
expected at 8.3%
Domestic inflation print for August 2022 at 7%
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
10-year G-sec 10-year SDL 10-year corporate bonds
10 Year GSec, SDL & HFC
The yield on the 10-year benchmark G-sec hardened by 20 bps on-month in September, closing at 7.39%. The yield on 10-year Benchmark Bonds - NBFC (Bajaj Finance) increased by 20 bps to 8.07% as opposed to 7.87% in the month of August 2022, while that on SDLs rose 8 bps to close at 7.59%.
10-year Benchmark Bonds – NBFC hardens
Source: CRISIL Research
The spread of 10-year benchmark SDL over the benchmark G-sec narrowed by 12 bps over the past month due to higher demand and lower supply in the auction, closing at a spread of 20 bps. Meanwhile, the 10-year AAA-rated public-sector corporate bond spread remained flattish to 26 bps on account of limited supply and increased demand in the 10-year segment.
The 12-month average spread for the 10- year benchmark SDL and corporate bond over the G-sec were 39 bps and 34 bps, respectively.
Spreads narrowed for SDLs over 10-year benchmark G-sec
Source: CRISIL Research
Spread over US treasury narrowed
Source: CRISIL Research
The 10-year US treasury (UST) yield closed at 3.83% in September, 72 bps higher than the August close of 3.11%, driven by the Fed’s hawkish stance, aggressive rate hikes and their 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 3.75% from 4.36%.
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
INR 10-year G-sec 10-year US Treasury Spread (R.H.S.)
10 Year Gsec, SDL & NBFC
10 yr-Spreads of CB & SDL over benchmark G-sec
5.00%
5.50%
6.00%
6.50%
7.00%
7.50%
8.00%
8.50%
30-Sep 31-Oct 30-Nov 31-Dec 31-Jan 28-Feb 31-Mar 30-Apr 31-May 30-Jun 31-Jul 30-Aug 30-Sep
10-year G-sec 10-year SDL 10-year Benchmark Bonds- NBFC
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
SDL spreads Corporate bond spreads
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Systemic liquidity remains lower
Term premium between 10-year benchmark G-sec and TREPS narrows
Average systemic liquidity fell to ~Rs 0.72 lakh crore in September from ~Rs 1.21 lakh crore the previous month. Daily surplus liquidity reached a high of ~Rs 2.16 lakh crore during the month. Average surplus for the past 12 months stood at ~Rs 4.91 lakh crore. Continuous VRRR auctions by the RBI and credit offtake led to absorption of surplus liquidity from the market. The systemic liquidity at September end stood at ~Rs 0.33 lakh crore.
The average spread between the 10-year benchmark G-sec yield and the tri-party repo (TREPS) narrowed to ~184 bps in September from ~221 bps in August. The 12-month average spread stood at ~293 bps.
Net liquidity injected [injection (+)/absorption (-)]* (Rs crore)
Benchmark spreads over G-sec narrowed
Spreads over G-sec*
Rating
category Date PSUs/
corporates NBFCs Housing finance companies
AAA 31-Aug-22 0.08% 0.48% 0.41%
30-Sep-22 0.10% 0.45% 0.34%
AA+ 31-Aug-22 0.65% 1.60% 0.91%
30-Sep-22 0.52% 1.51% 0.83%
AA 31-Aug-22 1.44% 3.68% 3.18%
30-Sep-22 1.38% 4.13% 3.74%
AA- 31-Aug-22 2.24% 4.68% 4.37%
30-Sep-22 2.24% 4.06% 4.12%
Note: *Spreads are for five-year securities over annualised G-sec yield Source: CRISIL Research
Source: CRISIL Research
Source: CRISIL Research -1,000,000.00-900,000.00-800,000.00-700,000.00-600,000.00-500,000.00-400,000.00-300,000.00-200,000.00-100,000.00100,000.000.00
30-Aug-21 30-Sep-21 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
Net liquidity injected [injection (+)/absorption (-)] *
FPIs turn net sellers in September
Net FPI outflow in September was Rs 3,955 crore compared with net inflow of Rs 56,521 crore in August. Debt market continued to see inflows for the second month to the tune of Rs 4,012 crore. Equity saw outflows of Rs 7,624 crore.
Source: CRISIL Research
FPI net investments in Debt (Rs Crore)
Source: CRISIL Research
Average trading volume decreased across securities, barring T-bills & CPs
Trading volume of G-Secs and SDLs decreased ~2% and ~21%, respectively, while those of treasury bills (T-bills) increased ~6%. Trading volume of CPs increased ~49%, while that of CDs and corporate bonds decreased ~7% each.
Monthly average trading volume (Rs crore)
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
Jul-22 Aug-22 Sep-22 12 Month- Avg
SDL TBILL CD
CP Corporate Bond G-sec (R.H.S.)
(1,545) (3,310)
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
-30000 -25000 -20000 -15000 -10000 -5000 0 5000 10000 15000
Key downgrades and upgrades
Downgrades
Issuer name Old rating New rating
Jindal Saw Ltd. CARE AA CARE AA-
Sadbhav Engineering Ltd. IND BB+ IND C
Andhra Pradesh Capital Region Development Authority BWR A+(CE) BWR BBB+(CE)
Sadbhav Engineering Ltd. CARE B+ CARE C
Upgrades
Issuer name Old rating New rating
Kaynes Technology India Ltd. IND BB IND BB+
Poonawalla Fincorp Ltd. CARE AA+ CARE AAA
Poonawalla Fincorp Ltd. (Perpetual) CARE AA CARE AA+
Poonawalla Housing Finance Ltd. CARE AA+ CARE AAA
Shreeyam Power & Steel Industries Ltd. BWR B+ BWR BB
Pune Solapur Expressways Pvt. Ltd. [ICRA]AA(CE) [ICRA]AA+(CE)
Tata Realty & Infrastructure Ltd. [ICRA]AA [ICRA]AA+
Aavas Financiers Ltd. CARE AA- CARE AA
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