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CRISIL’s outlook on near-term rates
January 2020
Research
Analytical contacts
Jiju Vidyadharan
Senior Director - Funds & Fixed Income Research [email protected]
Richa Dhariwal
Associate Director, Funds & Fixed Income Research [email protected]
Ankit Kala
Associate Director, Funds & Fixed Income Research [email protected]
Dharmakirti Joshi Chief Economist
[email protected] Dipti Deshpande
Senior Economist, CRISIL Ltd.
Contents
Executive summary 3
Factors influencing the outlook 4
December at a glance 6
Research
Yields on the 10-year benchmark government security (G-sec) opened December 2019 at 6.49%, rising to a high of 6.80% at near-about the mid-month mark. Yields reversed course thereafter, closing the month at 6.56%, which was marginally outside CRISIL’s forecast of 6.60-6.80%. The fall in yield was because of the Reserve Bank of India’s (RBI) surprise announcement of ‘operation twist’.
With expectations of a rate cut not fructifying, the 10-year benchmark G-sec rose up to the mid-point of the month. The Monetary Policy Committee (MPC) kept rates unchanged with an eye on inflation. Also hardening the yields were rising US treasury rates and crude oil prices, and heavy selling by foreign investors. A further tailwind was from fears of a sovereign rating downgrade - S&P hinted at downgrading India’s rating if economic and growth conditions did not improve.
The consumer price index (CPI) print of 5.54% for November 2019, which was a 40-month high, sustained the upward trajectory, with the yield ending the fortnight at 6.79%, or ~30 basis points (bps) higher than the start of the month.
In the second half of the month, the RBI’s announcement of operation twist brought cheer to the market. The central bank’s announcement of open market operation (OMO) purchases of the 10-year benchmark G-sec and simultaneous sale of shorter tenure (2020 maturity) securities with the objective of lowering term premiums pulled down the 10-year G-sec to 6.60%.
The yield slid some more following a second round of operation twist. A further decline was arrested because of profit-booking by investors and rising crude oil prices, with the 10-year benchmark G-sec ending the month at 6.56%, 9 bps higher than previous month’s closing.
The spread over the new 10-year benchmark G-sec was 97 bps for corporate bonds and 60 bps for state development loans (SDLs). CRISIL’s view for the 6.45% G-sec 2029 yield is 6.55%-6.75% for January-end and 6.80%-7.00% for March-end. Spreads for corporate bonds and SDLs are expected to remain steady over the next three months.
Executive summary
CRISIL’s outlook
Benchmark Dec 31,
2019(A) Jan 31,
2020(F) Mar 31, 2020(F)
10-year G-sec yield
(6.45 GS 2029) 6.56 6.55-
6.75 6.80- 7.00 10-year SDL yield 7.16 7.15-
7.35
7.40- 7.60 10-year corporate
bond yield 7.53 7.55-
7.75
7.80- 8.00
A: Actual; F: Forecast Source: CRISIL Research
One-month view
In January 2020, yields are likely to be affected by concerns over fiscal slippage, increase in Crude oil prices and expectations of increase in Inflation.
Three-month view
In the three months through March 2020, yields are likely to be dictated by the Union Budget 2020-21, fiscal developments, monetary policy outcomes, global interest rates, US-China trade war, and the rupee-dollar equation.
Framework for outlook
CRISIL provides its outlook on key benchmark rates for different debt classes – 10-year G-secs, corporate bonds, and SDLs. The outlook is arrived at by combining statistical models with inputs from our experts. The judgement incorporates our view on policy expectations, macroeconomic outlook, key events (Indian and global), market factors (liquidity and demand/supply), among others. All yields quoted are closing levels.
On interest rates
(%)
Research
Economic parameter Our view Impact on
yields GDP growth • We expect GDP to grow 5.1% in fiscal 2020 compared with
6.8% previous year.
• We believe the second half of the fiscal will see mild pick- up led by adequate monsoon and the support to the rural economy, some delayed impact of repo rate cuts, and spillover of recent pick-up in government spending. Low-base effect will also help.
• GDP growth dropped to 4.5% on-year in the second quarter of fiscal 2020 from 5% previous quarter.
CPI inflation • We have revised up our CPI inflation forecast to 4% average for fiscal 2020 from 3.6% expected earlier. This is also higher than 3.4% in 2019.
• Sharp rise in food inflation, driven by vegetables and puls- es has driven the recent rise in inflation. Low base effect of last year would further keep food inflation firm in the coming months. Price increases in telecom could also add upside to the headline number.
• CPI inflation rose to a 40-month high of 5.54% in November, compared with 4.6% previous month.
RBI’s monetary policy • We believe RBI is likely to tilt towards a pause in the upcoming monetary policy meet in February. More clarity will emerge post the budget announcement and the fiscal stance of the government.
• Food inflation has surprised on the upside and likely to remain firm in the near future. Household inflation expectations have already gone up. Also two transitory risks to core inflation going ahead could emerge from hike in telecom prices and possible increase in GST rates.
• The Monetary Policy Committee kept repo rate unchanged at 5.15% in its December meeting.
Fiscal deficit • The central government has targeted a fiscal deficit of 3.3% of GDP in this fiscal compared with 3.4% previous year. However, risks of fiscal slippage have risen given slowing tax collections and weak GDP growth. Achieving this fiscal target would require aggressive disinvestments.
• Fiscal deficit has already reached 115% of full year target in the first eight months of fiscal 2020.
Crude oil prices • CRISIL Research expects crude prices to range $60-63 per barrel in 2020 (calendar year), compared with an average of
$64 per barrel in 2019
• Brent crude oil prices rose 5% on-month to $65.9 per barrel on average in December
Factors influencing outlook
Research
Economic parameter Our view Impact on
yields Current account deficit • Current account deficit (CAD) expected to reduce to 1.4% of
GDP in fiscal 2020 compared with 2.1% of GDP in fiscal 2019.
• The easing is expected primarily on account of low crude oil prices relative to last year and weak domestic demand.
• CAD sharply narrowed to 0.9% of GDP in the second quarter of this fiscal, compared with 2% of GDP previous quarter and 2.9% of GDP in second quarter last year.
US Federal Reserve’s
stance • S&P Global expects the US Fed to keep policy rate on hold at 1.50%-1.75% through 2020.
• The Fed kept rate unchanged at 1.50%-1.75% in its December meeting.
Liquidity indicators
- Demand & Supply
Supply side
• Additional supply of G-secs could be infused in the coming months to meet the fiscal gap
• Additional special OMO purchases will continue to put downward pressure on yields
• Issuance of new cash management bill in December Demand side
• PSU Bond ETF may increase demand for liquid AAA corporate bonds, which will be a part of the index constituents
• Demand for AA and lower-rated non-banking financial company (NBFC) and housing finance company (HFC) paper remains low.
- Call rates/LAF (liquidity adjustment facility)
• Interbank call money rates remained below the RBI’s repo rate of 5.15% for most part of the month, owing to ample liquidity in the system. The central bank conducted frequent reverse repo auctions, noting the surplus funds with lenders However, the RBI also conducted intermittent repo auctions to manage sporadic spike in the call rates
Research
6.40%
6.45%
6.50%
6.55%
6.60%
6.65%
6.70%
6.75%
6.80%
6.85%
6.90%
2-Dec-19 3-Dec-19 4-Dec-19 5-Dec-19 6-Dec-19 9-Dec-19 10-Dec-19 11-Dec-19 12-Dec-19 13-Dec-19 16-Dec-19 17-Dec-19 18-Dec-19 19-Dec-19 20-Dec-19 23-Dec-19 24-Dec-19 26-Dec-19 27-Dec-19 30-Dec-19 31-Dec-19
10-year G-sec benchmark yield RBI does
not cut rate
Operation twist announced
Second Operation twist announced
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
31-Dec-11 29-Jun-12 31-Dec-12 28-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 30-Jun-15 31-Dec-15 30-Jun-16 30-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19
10-year benchmark yields
10 year G-Sec 10 year SDL 10 year corporate bonds
0 10000 20000 30000 40000 50000
0 2000 4000 6000 8000 10000
Oct-19 Nov-19 Dec-19 12 Month- Avg Monthly average (Rs crore)
SDL T-bill CD
CP Corporate bonds G-sec (RHS)
The 10-year G-sec yield was volatile in December, starting at 6.49% and reaching a high of 6.80% at the mid-month mark.
Yields subsequently started falling, and closed the month at 6.56%, 9 bps higher than the previous month.
Corporate bonds and SDLs ended the month at 7.53% and 7.16%, respectively, 8 bps and 1 bps higher than the previous month.
Source: CRISIL Research
Source: CRISIL Research
Source: CRISIL Research
Average traded volume
In December 2019, the trading volume of treasury bills (T-bills) and SDLs increased
~20% on-month. The huge trading volume for T-bills was because of discounted cash management bill issued on the last day of December, and for SDLs, it was because of increased market activity by PSU banks and demand for high yielding securities.
In contrast, average volume for commercial paper and G-secs declined ~17% on-month owing to buy-and-hold strategy adopted by market participants, whereas it was relatively flat for certificate of deposit and corporate bonds.
December at a glance
G-sec yields rose as FPIs sold amid sovereign downgrade buzz, and rising US yields and crude oil prices
Research
-400000 -300000 -200000 -100000 0
2-Oct-19 8-Oct-19 14-Oct-19 20-Oct-19 26-Oct-19 1-Nov-19 7-Nov-19 13-Nov-19 19-Nov-19 25-Nov-19 1-Dec-19 7-Dec-19 13-Dec-19 19-Dec-19 25-Dec-19 31-Dec-19
Net liquidity injected [injection (+)/absorption (-)]* (Rs crore)
Net liquidity injected [injection (+)/absorption (-)] * 0.00%
0.50%
1.00%
1.50%
31-Dec-11 29-Jun-12 31-Dec-12 28-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 30-Jun-15 31-Dec-15 30-Jun-16 30-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19
Spreads over G-sec (%)
SDL spreads(RHS) Corporate bonds spreads(RHS) 0.00%
0.50%
1.00%
1.50%
31-Dec-11 29-Jun-12 31-Dec-12 28-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 30-Jun-15 31-Dec-15 30-Jun-16 30-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19
Spreads over G-sec (%)
SDL spreads(RHS) Corporate bonds spreads(RHS) 0.00%
0.50%
1.00%
1.50%
31-Dec-11 29-Jun-12 31-Dec-12 28-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 30-Jun-15 31-Dec-15 30-Jun-16 30-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19
Spreads over G-sec (%)
SDL spreads(RHS) Corporate bonds spreads(RHS)
Spreads compressed for SDLs
Source: CRISIL Research
Systemic liquidity
Source: RBI
* Net liquidity is calculated as Repo+MSF+SLF-Reverse Repo
• The banking system continued to register surplus liquidity over the past six months. In December 2019, average surplus liquidity was ~Rs 2,56,000 crore versus ~Rs 2,38,000 crore in the previous month. Liquidity has remained in surplus, as incremental deposit growth outpaced incremental credit growth. However, net liquidity reduced when RBI conducted Operation Twist and also due to advance tax payments.
• Meanwhile, the yield spread narrowed 8 bps on-month for the 10-year SDLs over the 10-year G-sec in December 2019 and 1 bps for the 10-year AAA-rated public sector corporate bonds.
Spreads for NBFCs narrow over G-sec
Spreads over G-sec*
Rating
Category Date PSU /
Corporates NBFC Housing Finance Companies AAA 30-Nov-19 0.40% 2.27% 0.87%
31-Dec-19 0.46% 2.06% 0.91%
AA+ 30-Nov-19 1.34% 3.17% 3.07%
31-Dec-19 1.40% 2.96% 3.10%
AA 30-Nov-19 2.10% 5.41% 4.12%
31-Dec-19 2.11% 5.15% 4.03%
AA- 30-Nov-19 2.66% 6.78% 5.17%
31-Dec-19 2.69% 6.74% 4.96%
*Spreads are for five-year securities over annualised G-secs Source: CRISIL Research
Research
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
30-Dec-10 30-Jun-11 31-Dec-11 30-Jun-12 31-Dec-12 30-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 30-Jun-15 31-Dec-15 30-Jun-16 31-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19
10 year benchmark yields
INR 10 year G-Sec US 10 year G-Sec
(10,970) 43 3,414 (10,198) (9,978)5,610 4,749 (1,301) (6,037) 12,002 (5,099) 1,111 8,319 9,433 11,672 (990) 3,670 (2,358) (4,616)
-15000 -10000 -5000 0 5000 10000 15000
Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19
(Rs crore)
• The average spread between the repo rate and the 10-year benchmark G-sec was ~149 bps in December 2019, wider than the 12-month average spread of 122 bps and the 10-year average of ~91 bps.
Spreads over repo rate widens
Source: CRISIL Research
10 year G-sec- Repo rate
Net investments by FPIs in debt
• December 2019 saw FPI outflow of Rs 4,616 crore in the debt market and total inflow (including equity and hybrid) of Rs 2,762 crore. FPIs continued to purchase equity, but the net inflow reduced 70%
on-month in December and net debt outflow almost doubled. Major outflows in debt were seen in the sovereign and financial services sectors, as per the data shared by National Securities Depository Ltd (updated until December 15, 2019).
Source: CRISIL Research, National Securities Depository Ltd
• The spread between yields on the 10- year benchmark G-sec and the 10-year US Treasury was relatively flat at 477 bps vis-à-vis 469 bps in the previous month.
Spread over US treasury yield
Source: CRISIL Research
-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
30-Jun-09 31-Dec-09 30-Jun-10 31-Dec-10 30-Jun-11 31-Dec-11 30-Jun-12 31-Dec-12 30-Jun-13 31-Dec-13 30-Jun-14 31-Dec-14 30-Jun-15 31-Dec-15 30-Jun-16 31-Dec-16 30-Jun-17 31-Dec-17 30-Jun-18 31-Dec-18 30-Jun-19 31-Dec-19
Historical term premium
Research
Key downgrades and upgrades in the past one month
Downgrades
Issuer name Old rating New rating
Brigade Properties Pvt Ltd [ICRA]A [ICRA]A-
CanFin Homes Ltd IND AAA IND AA
Clean Max Enviro Energy Solutions Pvt Ltd [ICRA]BBB+ [ICRA]BBB
Diligent Media Corporation Ltd [ICRA]BB(SO) [ICRA]B
Essel Infraprojects Ltd BWR BB-(SO) BWR C(SO)
Essel Lucknow Raebareli Toll Roads Ltd IND AA+ IND A
Essel Lucknow Raebareli Toll Roads Ltd CARE AA CARE BBB
Forbes Technosys Ltd [ICRA]A(SO) [ICRA]BBB+(SO)
Grand View Estates Pvt Ltd [ICRA]A+(SO) [ICRA]A(SO)
Hero Solar Energy Pvt Ltd [ICRA]A+ [ICRA]A
Hero Wind Energy Pvt Ltd [ICRA]A+ [ICRA]A
IFCI Ltd [ICRA]BBB [ICRA]BBB-
Indiabulls Real Estate Ltd BWR AA(SO) BWR AA-
Indian Receivable Trust BWR AAA(SO) BWR A+(SO)
Janaadhar (India) Pvt Ltd [ICRA]BBB- [ICRA]BB+
Karvy Financial Services Ltd [ICRA]BBB [ICRA]B-
Leap India Pvt Ltd CRISIL BBB- CRISIL BB+
Rajasthan Financial Corporation BWR A+(SO) BWR A-(SO)
Rajasthan Rajya Vidyut Prasaran Nigam Ltd BWR A+(SO) BWR A-(SO)
Rajasthan State Road Transport Corporation BWR A+(SO) BWR A-(SO)
Sare Gurugram Pvt Ltd BWR BBB(SO) BWR BB
SD Corporation Pvt Ltd CARE AA-(SO) CARE A+(SO)
Simplex Infrastructures Ltd CARE BB+ CARE D
SP Imperial Star Pvt Ltd CARE A CARE A-
Sprit Infrapower & Multiventures Pvt Ltd BWR BB-(SO) BWR C(SO)
Sunny View Estates Pvt Ltd [ICRA]A+(SO) [ICRA]A(SO)
Vodafone Idea Ltd BWR A- BWR BBB-
Yes Bank (Basel III Compliant Additional Tier I Bond) [ICRA]BBB+ [ICRA]BBB Yes Bank (Basel III Compliant Additional Tier I Bond) IND A- IND BBB+
Yes Bank (Basel III Compliant Additional Tier I Bond) CARE BBB+ CARE BBB
Upgrades
Issuer name Old rating New rating
Bhilwara Green Energy Ltd [ICRA]BBB [ICRA]BBB+
Aptus Value Housing Finance India Ltd CARE A CARE A+
JK Paper Ltd CRISIL A+ CRISIL AA-
Aye Finance Pvt Ltd [ICRA]BBB [ICRA]BBB+
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