Research
RateView
CRISIL’s outlook on near-term rates
October 2021
Research
Analytical contacts
Bhoomika Dattani
Manager, Funds & Fixed Income Research [email protected]
Kalpi Gopani
Research Analyst, Funds & Fixed Income Research [email protected]
Apurva Deshmukh
Research Analyst, Funds & Fixed Income Research [email protected]
Dharmakirti Joshi Chief Economist
[email protected] Dipti Deshpande
Director, CRISIL Ltd
[email protected] Pankhuri Tandon
Economist, CRISIL Ltd [email protected]
Contents
Seesawing September 3
Factors influencing the outlook 4
September at a glance 6
Research
Yield on the 10-year benchmark government security (G-sec), the 6.10% GS 2031, moved in a range of 6.12-6.22% in September. It opened at 6.21% and closed at 6.22%, similar to the August closing, and well within the 6.10-6.30%
band forecast by CRISIL.
During the first half of the month, the benchmark G-sec traded with a positive bias due to favourable domestic cues, such as GST collections, strong weekly auction demand, and announcement of the G-sec Acquisition Programme (GSAP 2.0).
GST collections for August printed at a strong Rs 1.12 lakh crore, though, marginally lower than the previous month’s Rs 1.16 lakh crore. The benchmark yield closed at 6.17% mid-month after the Reserve Bank of India (RBI) said there is no need for the government to borrow additional funds from the market. A surge in crude oil prices from
$71.99/barrel to $75/barrel and an increase in the US Treasury yield mid-month cast long shadows on the 10-year benchmark G-sec yield.
The second half of the month saw the yield ease considerably to 6.12% before rising again to 6.22% closer to the month-end.
Yields softened due to the announcement of open market purchase of Government of India securities under GSAP 2.0 and simultaneous sale of Government of India securities, coupled with firm demand from foreign portfolio investors (FPIs). However, these gains were short-lived and reversed following hawkish Federal Reserve (Fed) commentary and concerns around tapering of its current bond purchase programme that led to a hardening of 10- 11 bps in 10-year US Treasury yields. The 10-year benchmark closed at 6.17% on September 24.
Yields at the shorter end spurted after the RBI set the cut-off in the variable rate reverse repo auction at 3.99% – the highest possible cut-off at 1 basis point below the repo rate. However, passive play ahead of the central bank’s monetary policy meeting led the benchmark 10-year yield to close the month at 6.22%. Crude oil pushing ~$80/
barrel towards the month-end and US Treasury yields touching 1.55% also weighed on the yields and a surprise announcement of no additional borrowing for GST compensation, along with lower-than-expected government borrowing for the second half of this fiscal limited the uptrend.
Seesawing September
One-month view
In October, yields are likely to be guided by crude oil prices, FPI flows, domestic and global growth trends, inflation outlook, investor appetite at G-sec auctions, further announcements of Variable Rate Reverse Repo, global interest rates, and recovery of economic activities in certain parts of the country amid the decline in daily Covid-19 case counts.
Three-month view
In the three months through December, yields are likely to be dictated by the Monetary Policy Committees (MPC) decision on rates and measures taken to manage surplus liquidity , crude oil prices, domestic GDP growth, FPI flows, inflation numbers and Fed’s action on tapering its bond purchases. The three-month view is also likely to be affected by vaccination coverage and the unfolding Covid-19 situation amid growing uncertainty surrounding a third wave.
Framework for outlook
CRISIL provides its outlook on key benchmark rates for different debt classes: 10-year G-secs, state development
CRISIL’s outlook
Benchmark Septem- ber 30, 2021 (A)
October 31, 2021 (F)-Teams view
Decem- ber 31, 2021 (F)- Teams view 10-year G-sec
yield* 6.22% 6.22%-
6.42% 6.37%- 6.57%
10-year SDL yield 6.81% 6.82%-
7.02% 6.97%- 7.17%
10-year corporate 6.78% 6.82%- 6.97%-
On interest rates
Research
Economic parameter Our view Impact on
yields Gross domestic
product (GDP) growth
• We expect India’s real GDP to grow 9.5% on-year in fiscal 2022 compared with -7.3% previous year.
• Continuous improvement in most high-frequency indicators since June suggests that the economy is clearly moving past the impact of the second wave. With the pace of vaccination gathering pace, the performance of contact- based services, which have been hit the hardest, is expected to gradually pick up.
• GDP grew 20.1% on-year in first quarter of fiscal 2022 (Q1 FY22), buoyed by low base (the economy had tanked 24.4%
in Q1 FY21).
Consumer price index
(CPI) inflation • We expect consumer price index (CPI)-linked inflation to average 5.8% on-year in fiscal 2022 compared with 6.2% in fiscal 2021.
• Easing food inflation and high base effect are expected to bring down headline inflation relative to last year. However, non-food inflation continues to face pressures from elevat- ed global commodity prices and shipping costs. We expect producers to pass-through rising costs of production as domestic demand recovers in the second half of this fiscal.
• CPI inflation eased to 5.3% on-year in August compared with 5.6% previous month and 6.7% in August 2020.
RBI’s monetary policy • We expect RBI to continue normalizing its monetary policy in the coming months and hike repo rate by 25 basis points to 4.25% by end-fiscal 2022, assuming strengthening eco- nomic recovery and elevated inflation risks.
• The MPC kept policy rates unchanged and maintained its accommodative stance in October. The repo rate stands at 4.0%, reverse repo at 3.35% and marginal standing facility at 4.25%. RBI stopped short of announcing new liquidi- ty-enhancing measures such as GSAP, and will increase the liquidity absorption under variable rate reverse repo opera- tions.
Fiscal health • Centre’s fiscal deficit is budgeted at 6.8% of GDP in fiscal 2022 compared with 9.3%1 in fiscal 2021.
• In the first five months of fiscal 2022, Centre’s fiscal deficit reached 31.1% of the budget estimate, lower than 109.3% in same period in fiscal 2021, and also 78.7% in pre-pandemic fiscal 2020. Higher tax collections (as a proportion of budgeted target) than previous year, coupled with lower revenue and capital expenditure led to lower fiscal deficit.
Factors influencing outlook
1Provisional estimate
Research
Economic parameter Our view Impact on
yields Crude oil prices • CRISIL Research expects crude prices to range $68-73 per
barrel in 2021 (calendar year), compared with an average of
$42.3 per barrel in 2020.
• Brent crude oil prices averaged $74.6 per barrel in
September, 6.5% higher on-month and 81.5% higher on year.
Current account
balance • We expect current account balance to average a deficit of 1.2% of GDP in fiscal 2022, compared with a surplus of 0.9%
of GDP last year.
• Rising commodity prices and recovering domestic demand is expected to push up import growth.
• Current account turned surplus at 0.9% of GDP in the first quarter of this fiscal, as the second Covid-19 wave hit imports. This compares with a deficit of 1% of GDP previous quarter and surplus of 3.7% of GDP in first quarter last year.
US Federal Reserve’s
stance • S&P Global expects the Fed to begin tapering of asset in December 2021, and lift policy rates from December 2022.
• The Federal Open Market Committee (FOMC) kept the policy rate at 0%-0.25%, and bond-buying program unchanged in its September meeting.
Liquidity indicators - Demand & Supply
Supply side
• Calendar for Auction of Government of India Treasury Bills for the Quarter ending December 2021 is expected to amount to Rs 2,60,000 crore
• Issuance Calendar for Marketable Dated Securities for October 2021-March 2022 is expected to amount to Rs 5,03,000 crore
• Indicative Calendar of Market borrowings by state
governments/union territories for October-December 2021 is expected to be Rs 2,01,910.87 crore
Demand side
• Increased demand for shorter tenor papers based on VRRR
• India’s inclusion in the global bond indices will garner additional demand for G-secs in the coming months
• The central government is looking at a backstop facility to deepen bond markets; it will help create additional demand for credit papers
- Call rates/LAF (liquidity adjustment facility)
• Interbank call money rates remained below the RBI’s repo rate of 4% in September amid comfortable liquidity in the system. Noting the surplus liquidity, the central bank conducted variable rate reverse repo auctions on September 7 and September 9 for a notified amount of Rs 50,000 crore and Rs 3.5 lakh crore, respectively. It received offers amounting to ~Rs 2.64 lakh crore in the first auction and ~Rs 5.21 lakh crore in the second auction. The RBI also
Research
Yields on corporate bonds (10-year PSU FI) and SDLs eased by 10 bps and 6 bps, respectively, to close at 6.78% and 6.81%, compared with 6.88% and 6.87%, respectively, the previous month.
Source: CRISIL Research
Source: CRISIL Research
September at a glance
Source: CRISIL Research
Spreads narrow for SDLs and corporate bonds 10-year benchmark yield moderates
For the 10-year benchmark SDL and 10- year AAA-rated public-sector corporate bonds, spreads over the benchmark G-sec narrowed by 5 bps and 9 bps, respectively, over the past month and came down to 60 bps and 57 bps, respectively. The 12-month average spreads for the 10-year benchmark SDL and corporate bonds over G-sec are 68 bps and 71 bps, respectively.
10-year benchmark G-sec yield clambers up
Expectation of announcement of details for the last tranche of OMO purchase auction under G-SAP 2.0 for the current quarter Stronger GST collection and
RBI comment that there isn’t a need for the Government to borrow additional funds
Firm demand from FPI
Hawkish commentary by Federal Reserve’s Chairman and concerns over tapering bond purchase programme
No additional borrowing announced
6.10%
6.15%
6.20%
6.25%
6.30%
31-Aug-21 01-Sep-21 02-Sep-21 03-Sep-21 04-Sep-21 05-Sep-21 06-Sep-21 07-Sep-21 08-Sep-21 09-Sep-21 10-Sep-21 11-Sep-21 12-Sep-21 13-Sep-21 14-Sep-21 15-Sep-21 16-Sep-21 17-Sep-21 18-Sep-21 19-Sep-21 20-Sep-21 21-Sep-21 22-Sep-21 23-Sep-21 24-Sep-21 25-Sep-21 26-Sep-21 27-Sep-21 28-Sep-21 29-Sep-21 30-Sep-21
G-sec level
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
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
SDL spreads Corporate bond spreads
Research
The 10-year US Treasury yield closed at 1.52% in September, 22 bps higher than the August close of 1.30%. The monthly average spreads between the domestic 10-year benchmark G-sec and the 10-year US Treasury yields thus narrowed to 4.80%
compared with 4.94% in August. The uptick in US Treasury yields was mainly because of concerns mounting over tapering of the Federal Reserve’s current bond purchasing programme.
Spread over the US Treasury narrows
Source: CRISIL Research
The average spreads between the benchmark 10-year G-sec yield and the tri-party repo (TREPS) narrowed by 21 bps to ~291 bps in September (versus ~312 bps in August), on par with the 12-month average spreads of
~292 bps.
Term premium between benchmark 10-year G-sec and TREPS narrowed
Source: CRISIL Research
Systemic liquidity remains in surplus
In September, the average surplus systemic liquidity was ~Rs 7.87 lakh crore, higher than the previous month’s average of ~Rs 7.42 lakh crore.
The daily surplus liquidity jumped to a high of Rs
~8.03 lakh crore by the month-end. The average surplus for the past 12 months was ~Rs 5.61 lakh crore. The continuous widening of surplus liquidity indicates low demand for bank credit by businesses owing to economic uncertainties and wariness of banks to lend on concerns surrounding Net liquidity injected [injection (+)/absorption (-)]* (Rs Crore)
-10,00,000.00 -9,00,000.00 -8,00,000.00 -7,00,000.00 -6,00,000.00 -5,00,000.00 -4,00,000.00 -3,00,000.00 -2,00,000.00 -1,00,000.00 0.00 1,00,000.00
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
INR 10-year G-sec 10-year US Treasury Spread (R.H.S.)
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Research
FPI investments in debt rise
In September, net total FPI inflow was Rs 12,804 crore, similar to the net inflow of Rs 12,144 crore seen in August, along with a significant inflow of Rs 13,154 crore in the equity segment with total net inflow of Rs 27756 crore in calendar year 2021 (highest inflow till date). The debt segment saw a steady inflow for two straight months following news about India’s inclusion in the global bond indices and government measures to support growth amidst macro challenges.
Source: CRISIL Research
(Rs crore)
Source: CRISIL Research
Average trading volumes increase across securities except T-bill
Trading volume for G-sec increased ~66%
on-month. Trading volume in commercial papers (CPs), certificates of deposit (CDs) increased ~16%, ~54% respectively.
Corporate bonds and SDL volumes increased ~21% and ~11%, respectively.
T-bill saw a decrease in trading volume of ~21%.FPI flows, favourable domestic conditions led to increment in G-sec volumes.
Monthly average trading volume (Rs crore)
Benchmark spreads over G-sec compress marginally across sectors
Spreads over G-sec*
Rating
category Date PSUs/
corporates NBFCs Housing finance companies
AAA 31-Aug-21 0.27% 0.57% 0.37%
30-Sep-21 0.21% 0.56% 0.36%
AA+ 31-Aug-21 1.41% 1.89% 1.40%
30-Sep-21 1.32% 1.94% 1.36%
AA 31-Aug-21 1.60% 4.87% 3.32%
30-Sep-21 1.59% 4.70% 3.34%
AA- 31-Aug-21 2.62% 5.28% 4.55%
30-Sep-21 2.52% 5.26% 4.54%
*Spreads are for five-year securities over annualised G-sec yield.
Source: CRISIL Research
(990) 3,670
(2,358) (4,616)
(11,648) 2,097
(60,376) (12,552)
(22,935) (1,545)(2,476)
(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
-70000 -60000 -50000 -40000 -30000 -20000 -10000 0 10000 20000
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 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
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-21 Aug-21 Sep-21 12 Month- Avg
SDL TBILL CD
CP Corporate Bond G-sec (R.H.S.)
Research
Key downgrades and upgrades in the past one month
Downgrades
Issuer name Old rating New rating
Tourism Finance Corporation Of India Ltd CARE A+ CARE A
Renew Wind Energy (Jath) Ltd IND AA+(CE) IND AA(CE)
Shiksha Financial Services India Pvt Ltd BWR BBB- BWR BB+
PVR Ltd CRISIL AA- CRISIL A+
SP Jammu Udhampur Highway Ltd IND AA+ IND AA-
Guruvayoor Infrastructure Pvt Ltd [ICRA]BBB [ICRA]BBB-
GMR Warora Energy Ltd CARE C CARE D
GMR Warora Energy Ltd IND C IND D
Moneywise Financial Services Pvt Ltd CARE A CARE A-
Upgrades
Issuer name Old rating New rating
GMR Pochanpalli Expressways Ltd CARE D CARE B-
Steel Authority Of India Ltd IND AA- IND AA
JMC Projects (India) Ltd CARE A+ CARE AA-
Bank of Baroda (( Perpetual Basel III Tier I) CARE AA CARE AA+
Bank of Baroda ((Upper Tier II) CARE AA+ CARE AAA
Fincare Small Finance Bank Ltd IND A- IND A
Samasta Microfinance Ltd CRISIL A+ CRISIL AA-
Bank of India ((Basel III Tier I) CRISIL AA- CRISIL AA
Star Health & Allied Insurance Co Ltd IND A+ IND AA-
Avanse Financial Services Ltd CARE A CARE A+
Bank of Maharashtra ((Lower Tier II) CRISIL A+ CRISIL AA-
IDBI Bank Ltd. (Tier II) [ICRA]A [ICRA]A+
Telesonic Networks Ltd CRISIL AA CRISIL AA+
Bharti Hexacom Ltd CRISIL AA CRISIL AA+
Canara Bank (Basel III Tier I) CRISIL AA CRISIL AA+
About CRISIL Limited
CRISIL is a leading, agile and innovative global analytics company driven by its mission of making markets function better.
CRISIL, its subsidiaries and associates, provide ratings, gradings, data, research, analytics and solutions, infrastructure advisory, and benchmarking services to its clients. Details of the services provided by CRISIL are available at https://crisil.com/
It is majority owned by S&P Global Inc (SPGI), a leading provider of transparent and independent ratings, benchmarks, analytics, and data to the capital and commodity markets worldwide. Details of the services provided by SPGI are available at https://www.standardandpoors.com/
en_US/web/guest/home About CRISIL Research
CRISIL Research, a division of CRISIL, is India’s largest independent integrated research house and is registered as a Research Analyst with SEBI (Registration No INH000007854). We provide insights, opinion, analysis, and data on the Indian economy, industry, capital markets, and companies. We also conduct executive training programs, predominantly in the area of credit and risk management. We are India’s one of the most credible providers of economy and industry research. Our analysis is supported by inputs from our large network of sources, including industry experts, industry associations, and trade channels. We play a key role in India’s fixed income markets, being the largest provider of valuation of fixed income securities to the mutual fund, insurance, and banking sector in the country. We are also a prominent provider of debt and hybrid indices to India’s mutual fund and life insurance industries as benchmarks for performance assessment.
CRISIL Research also undertakes Equity and Debt valuation, publishes Mutual Fund Ranking for mutual fund schemes (across equity, debt, and hybrid asset classes) and provides Portfolio Analytics for Institutional Investors, which involves deep analysis of portfolio for corporates, pension funds, and provident funds at an asset class level. Our platform for wealth managers, Alphatrax, offers in-depth analysis of performance and portfolio-based attributes for diverse asset classes. It also enables investors to assess industry and company level risks based on CRISIL’s proprietary models. We also provide Equity Support services to the domestic market intermediaries that use our research reports to assist their clients in making investment decisions in relation to listed or to be listed securities in India.
Quantix, our integrated data and analytics platform, finds use in diverse functions across the financial sector, corporates, and consulting firms including business strategy, deal/ loan origination, credit underwriting, risk monitoring, and treasury/ investment management.
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 large commercial banks and financial institutions as part of their credit/ risk management process.
Our SME Performance 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.
Our defining trait is the ability to convert information and data into expert judgments and analytics with utmost objectivity. We leverage our deep understanding of the macro-economy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages.
Our talent pool comprises of economists, sector experts, company analysts and information management specialists.
CRISIL Privacy Notice
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 assume 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.
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 Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings division and/ or CRISIL Risk and Infrastructure Solutions Limited (CRIS), 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 or CRIS.
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 | China | Hong Kong | India | Poland | Singapore | UK | USA | UAE
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
