RateView
CRISIL’s outlook on near-term rates
December 2022
Research
Analytical contacts
Poorva Saurkar
Associate Director, Funds & Fixed Income Research [email protected]
Purav Jagad
Senior Research Analyst, Funds & Fixed Income Research [email protected]
Aarti Yadav
Research Analyst, Funds & Fixed Income Research [email protected]
Rishav Agarwal and Urvashi Agarwal
Management Trainees, Funds & Fixed Income Research
Dharmakirti Joshi Chief Economist
Dipti Deshpande Principal Economist
Pankhuri Tandon Economist
Contents
Nervous November 3
Factors influencing the outlook 4
The month at a glance 6
The yield on the 10-year benchmark government security (G-sec; 7.26% GS 2032) opened the month at 7.40% and closed at 7.28%, down 16 basis points (bps) from the October close of 7.45% and outside CRISIL’s forecast range of 7.40-7.60%.
Volumes were muted at the start of the month, with the market waiting for fresh cues due to the off-cycle Monetary Policy Committee (MPC) meet under the provisions of Section 45ZN of the Reserve Bank of India Act, 1934, its discussion on high inflation, and the report to be sent to the government.
A surge in oil prices to ~$100/bbl and US treasury yields took the benchmark yield to 7.48% on November 3, the highest in the month. Crude prices declined steadily then onwards, and domestic yields followed.
Expectations of inflation being lower than in previous months also pulled down yields. The United States (US) inflation print came in at 7.7% for October, significantly lower than market expectations of 8%, while the domestic consumer price index (CPI) inflation was in line with market expectations at 6.8%.
The benchmark yield closed at 7.27% at the mid-month mark.
In the second half of the month, the benchmark yield remained in a narrow range of 7.27-7.33% due to a slew of factors – participants read into the dovish Federal Open Market Committee meeting minutes, crude oil declined to ~$83/bbl, US treasury yields fell, pandemic-related restrictions in China were eased, and oil trade between Russia and China resumed.
The 10-year benchmark closed the month at 7.28%, with the market cautious and taking positions ahead of release of the gross domestic product (GDP) growth data post market hours on the closing day. According to the data, domestic GDP grew 6.3% during the July-September quarter, in line with a few forecasts.
On a postscript, after the MPC meeting on December 7, the Reserve Bank of India (RBI) maintained its inflation forecast of 6.7% for the fiscal and raised the repo rate by 35 bps to 6.25%, with the standing deposit facility and marginal standing facility at 6.00% and 6.50%, respectively. The MPC will remain focused on withdrawing accommodation to ensure inflation remains within the target range. Following the announcement, the 10-year G-sec closed the day at 7.28%.
Nervous November
One-month view
Yields are likely to be impacted by a range of factors in December, including crude prices, the MPC meeting, 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 February, yields are likely to be dictated by crude oil price movements, fiscal numbers, geopolitical tensions, Fed and RBI decisions on policy rates, as well as trends in India’s 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 Novem-
ber 30, 2022 (A)
Decem- ber 30, 2022 (P)
February 29, 2023 (P) 10-year G-sec
yield*
7.28% 7.30%-
7.40% 7.40%- 7.50%
10-year SDL yield
7.60% 7.60%-
7.70% 7.75%- 7.85%
10-year corporate
bond yield
7.55% 7.60%-
7.70% 7.75%- 7.85%
A: Actual; F: Forecast
*7.26% GS 2032 is the 10-year G-sec benchmark
On interest rates
Source: CRISIL MI&A Research
Economic parameter Our view Impact on yields Gross domestic
product (GDP) growth
• We expect India’s real GDP growth to slow from 7.0% on- year in fiscal 2023 to 6.0% in fiscal 2024. Risks are tilted to downside
• Slowing global growth will progressively weigh on domestic activity by next fiscal. While domestic demand has been resilient so far, it could come under pressure next fiscal with transmission of rate hikes and waning catchup of contact-based services
• GDP grew 6.3% on-year in the second quarter of current fiscal compared with 13.5% in the previous quarter Consumer price index
(CPI) inflation • We expect CPI inflation to average 6.8% this fiscal and 5.0%
in fiscal 2024
• Inflation is expected to moderate in the second half of the current fiscal, driven by a base effect and expectation of healthy rabi crop. Further, we expect moderation next fiscal as rising interest rates weigh on domestic demand
• CPI inflation moderated to 6.8% on-year in October from 7.4% in the previous month
RBI’s monetary policy • Between now and the next policy, RBI will closely monitor the impact of its previous rate hikes on domestic demand/
core inflation, as well as the actions of the US Fed. We ex- pect the RBI to strike if elevated inflation prolongs
• The MPC raised policy rates by 35 bps in December, a mod- eration compared with 50 bps hikes in each of the previous three policy meetings
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% in the previous year
• In first 7 months of this fiscal, the fiscal deficit was 45.6%
of the budget’s target, higher than 36.3% in the same period last year. Higher capex and lower tax receipts than last year were behind the higher deficit
Crude oil prices • We expect crude prices to moderate from $95-100 per barrel this fiscal to $80-85 per barrel in fiscal 2024
• Brent crude averaged $91.1 per barrel in November, 2.2%
lower on-month but 12.7% 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 average 3.2% of GDP in fiscal 2023, and moderate to 2.4% of GDP in fiscal 2024
• Core imports are not expected to slow as sharply as exports in the current fiscal, given relatively resilient domestic demand. However, weakening domestic demand will moderate core imports next fiscal
• 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’s policy rate peak at 5.00-5.25%
in April-June 2023. It then expects the Fed to cut rates in late 2023 as prices stabilise
• The Fed rate currently stands at 3.75%-4%, having increased 375 bps until November 2022
Liquidity indicators - Demand & Supply
Supply side
• Expected uptick in primaries for commercial papers (CPs) and certificates of deposit (CDs)
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 November amid sufficient liquidity in the system.
The RBI intermittently conducted variable-rate reverse repo auctions during the month to pull out excess liquidity
7.10%
7.15%
7.20%
7.25%
7.30%
7.35%
7.40%
7.45%
7.50%
7.55%
31-OCT-22 01-NOV-22 02-NOV-22 03-NOV-22 04-NOV-22 05-NOV-22 06-NOV-22 07-NOV-22 08-NOV-22 09-NOV-22 10-NOV-22 11-NOV-22 12-NOV-22 13-NOV-22 14-NOV-22 15-NOV-22 16-NOV-22 17-NOV-22 18-NOV-22 19-NOV-22 20-NOV-22 21-NOV-22 22-NOV-22 23-NOV-22 24-NOV-22 25-NOV-22 26-NOV-22 27-NOV-22 28-NOV-22 29-NOV-22 30-NOV-22
The yield on the 10-year benchmark G-sec and 10-year SDL softened 17 bps each on- month in November, closing at 7.28% and 7.60%, respectively. The yield on corporate bonds (10-year PSU FI) eased by 14 bps, closing at 7.55%.
Note: 7.26% GS 2032 is the 10-year G-sec benchmark Source: CRISIL MI&A Research
Source: CRISIL MI&A Research
Source: CRISIL MI&A Research
10-year benchmark yields soften 10-year benchmark G-sec yield
The yield on 10-year Benchmark Bonds – HFC (Housing Development Finance Corporation Ltd) decreased 17 bps to 7.81% as opposed to 7.98% in October. On the same lines, 10-year Benchmark Bonds – NBFC and NABARD closed to 7.95% and 7.55%, respectively, a 14 bps decrease as compared with October.
Awaiting cues from off cycle MPC
Hawkish commentary by Fed chair Jerome Powell
Lower inflation in US at 7.7% as against target of 8%
Domestic CPI came in at 6.8%, inline with market expectations
Dovish FOMC meeting minutes released
10 Year G-sec/SDL/CB
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
6.00%
7.00%
8.00%
9.00%
10-year G-sec 10-year SDL
10-year corporate bonds(Nabard) 10-year Benchmark Bonds- HFC 10-year Benchmark Bonds- NBFC
The spread of the 10-year benchmark SDL over the benchmark G-sec remained flat over the past month, closing at 32 bps.
Meanwhile, a 10-year AAA-rated public- sector corporate bond spread widened by 3 bps to 27 bps on account of muted demand for prime corporate bonds of longer maturity 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 35 bps and 30 bps, respectively.
were stagnant for SDLs
Source: CRISIL MI&A Research
The 10-year US Treasury (UST) yield closed at 3.68% in November, 42 bps lower than the October close of 4.10%. It was driven down by the dovish commentary of Fed Chairman Jerome Powell, indicating a slower pace of rate hikes in upcoming policies. The monthly average spread between the domestic 10-year benchmark G-sec yield and the 10-year UST yield remained flattish at 3.46% as compared with the previous month’s 3.47%.
Spread over US Treasury flattish
Source: CRISIL MI&A Research
Term premium between 10-year benchmark G-sec and TREPS widens
Source: CRISIL MI&A Research
The average spread between the 10-year benchmark G-sec yield and the tri-party repo (TREPS) widened to ~150s bps in November from ~141 bps in October. The 12-month average spread stood at ~267 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%
SDL spreads Corporate bond spreads
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
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.)
Source: CRISIL MI&A Research
Average trading volume increases across securities, barring SDL and CP
Trading volume of G-secs and Treasury bills increased ~5% and ~20%, respectively, while those of SDLs decreased ~3%.
Trading volume of CPs decreased ~21%, while that of CDs and corporate bonds increased ~32% and ~36%, respectively.
However, the primary market for CDs and CPs was more active.
In November, average systemic liquidity surplus was ~Rs 0.47 lakh crore, higher than the previous month’s ~Rs 0.07 lakh crore. Average surplus for the past 12 months stood at ~Rs 3.69 lakh crore.
Continuous credit offtake led to absorption of surplus liquidity from the market due to steps taken to curb inflation. Systemic liquidity at November-end was at a high of
~Rs 1.19 lakh crore.
Monthly average trading volume (Rs crore)
Net liquidity injected [injection (+)/absorption (-)]* (Rs crore)
Benchmark spreads over G-sec Widens
Spreads over G-sec*
Rating
category Date PSUs/
corporates NBFCs Housing finance companies
AAA 31-Oct-22 0.09% 0.44% 0.43%
30-Nov-22 0.18% 0.68% 0.50%
AA+ 31-Oct-22 0.46% 0.93% 0.87%
30-Nov-22 0.57% 1.29% 1.05%
AA 31-Oct-22 0.84% 1.81% 1.71%
30-Nov-22 0.93% 2.15% 1.93%
AA- 31-Oct-22 1.69% 2.83% 2.67%
30-Nov-22 1.82% 3.15% 2.78%
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.
Source: CRISIL MI&A Research
*Net liquidity is calculated as repo + MSF + standing liquidity facility - reverse repo Source: CRISIL MI&A 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 -100,000.00100,000.000.00 200,000.00 300,000.00 400,000.00
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
Sep-22 Oct-22 Nov-22 12 Month- Avg
SDL TBILL CD CP Corporate Bond G-sec (R.H.S.)
Net FPI outflow in November was Rs 1,637 crore compared with a net outflow of Rs 3,532 crore in October. Equity saw inflow of Rs 36,239 crore.
Source: CRISIL MI&A Research
FPI net investments in Debt (Rs Crore)
Key downgrades and upgrades
Upgrades
Issuer name Old rating New rating
Tata Realty & Infrastructure Ltd. CRISIL AA CRISIL AA+
Indian Overseas Bank [ICRA]A+ [ICRA]AA-
Karur Vysya Bank Ltd. [ICRA]A [ICRA]A+
Shubham Housing Development Finance Co. Ltd. [ICRA]A- [ICRA]A
Kosamattam Finance Ltd. IND BBB+ IND A-
Ind-Swift Laboratories Ltd. CARE BB- CARE BB
Heritage Max Realtech Pvt. Ltd. CARE B- CARE B+
Downgrades
Issuer name Old rating New rating
The Oriental Insurance Co. Ltd. [ICRA]AAA [ICRA]AA+
Energy Efficiency Services Ltd. CARE A+ CARE A
Finquest Financial Solutions Pvt. Ltd. BWR BB- BWR B+
(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) (1,637)
-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 Nov-22
insights, opinion, analysis, and data on the Indian economy, industry, capital markets, and companies.
We are the largest valuation agency for fixed income securities, and a prominent debt and hybrid index provider in India. We publish rankings for mutual fund schemes, and provide granular portfolio analysis services for asset managers, financial intermediaries, retirement funds and institutional investors.
Our data and analytics platforms - Alphatrax and Quantix - enable our clients to assess Industry and Company level risks based on CRISIL’s proprietary models.
CRISIL ESG Scores help benchmark companies based on their inherent ESG risk using public domain information and a proprietary framework.
Our Company reports (that combine select financial and non-financial data, analytics from our proprietary risk models, and commentary on company’s financial performance) are used by commercial banks, financial institutions, and non-banking finance companies as part of their credit/ risk management process.
Our SME Gradings, used by lenders, assess creditworthiness of SME enterprises relative to the peers leveraging our proprietary grading model. The framework includes assessment of entity-level financial and operating performance, as well as industry-level drivers.
CRISIL Privacy Statement
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL. For further information on CRISIL’s privacy policy please visit www.
crisil.com/privacy.
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.
Terms and Conditions
This Report is based on data publicly available or from sources considered reliable. CRISIL Research does not represent that the Report is accurate or complete and hence, it should not be relied upon as such. Opinions expressed herein are our current opinions as on the date of this report. Nothing in this report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The subscriber/
user assumes the entire risk of any use made of this data/ report. CRISIL especially states that, it has no financial liability whatsoever, to the subscribers/ users of this report.
This Report is additionally subject to your contractual terms with CRISIL.
The report is for use within the jurisdiction of India only. Nothing in this report is to be construed as CRISIL providing, or intending to provide, any services in other jurisdictions where CRISIL does not have the necessary permissions and/ or registration to carry out its business activities. The user will be solely responsible for ensuring compliance for use of the report, or part thereof, outside India.
CRISIL Limited operates independently of, and does not have access to information obtained by CRISIL Ratings Limited, which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research, and not of CRISIL Ratings Limited.
Company Disclosure
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.
3. CRISIL Research prohibits its analysts, persons reporting to analysts, and their relatives from having any financial interest in the securities or derivatives of companies that the analysts cover.
4. CRISIL Research or its associates collectively may own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report.
5. CRISIL Research or its associates may have financial interest in the form of holdings in the subject company mentioned in this report.
6. CRISIL receives compensation from the company mentioned in the report or third party in connection with preparation of the research report.
7. As a provider of ratings, grading, data, research, analytics and solutions, infrastructure advisory, and benchmarking services, CRISIL or its associates are likely to have commercial transactions with the company and may receive compensation for the services provided.
8. CRISIL Research or its associates do not have any other material conflict of interest at the time of publication of the report.
9. No material disciplinary action has been taken against CRISIL Research or its analysts by any Regulatory Authority impacting Research Analyst activities.
Argentina | Australia | China | Hong Kong | India | Japan | Poland | Singapore | Switzerland | UAE | UK | USA CRISIL Limited: CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai – 400076. India Phone: + 91 22 3342 3000 | Fax: + 91 22 3342 3001 | www.crisil.com
/company/crisil @CRISILLimited /CRISILLimited /user/CRISILLimited /lifeatcrisil
