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CRISIL’s outlook on near-term rates
July 2022
Research
Analytical contacts
Pooja Bandekar
Associate Director, Funds & Fixed Income Research [email protected]
Sourabh Prakash
Senior Research Analyst, Funds & Fixed Income Research [email protected]
Yadnesh Tari
Research Analyst, Funds & Fixed Income Research [email protected]
Rishika Todi
Research Analyst, Funds & Fixed Income Research [email protected]
Dharmakirti Joshi Chief Economist
Dipti Deshpande Principal Economist
Pankhuri Tandon Economist
Contents
June Jitters 3
Factors influencing the outlook 4
June at a glance 6
Research
The yield on the 10-year benchmark government security (G-sec; 6.54% GS 2032) opened June at 7.42% and closed at 7.44% — outside CRISIL’s forecast range of 7.50-7.70% and up 2 basis points (bps) from the May closing.
The month started on a weak note, with a surge in crude oil prices to a 13-week high of $124.40 per barrel and the 10-year United States Treasury (UST) yield to 3% on concerns over the upcoming inflation print. The 10-year G-sec yield touched a high of 7.53% in the first week, in anticipation of a rate hike by the Reserve Bank of India (RBI) at the ensuing meeting of the Monetary Policy Committee (MPC).
On June 8, the committee hiked key rates by 50 bps — taking the repo rate to 4.90%, the standing deposit facility (SDF) rate to 4.65%, and the marginal standing facility (MSF) rate to 5.15% — while keeping the cash reserve ratio unchanged. The central bank raised the inflation projection for fiscal 2023 to 6.7% from its April estimate of 5.7%.
Having run up in anticipation ahead of the hike, the benchmark yield softened and closed the day at 7.49%, but went on to close the week on a bearish note at 7.52%, reflecting concerns over the upcoming release of the US Consumer Price Index (CPI) print and domestic inflation print.
The third week of the month saw a jump in yields, with the 10-year G-sec reaching 7.60% after the US Federal Reserve (Fed) hiked interest rates by an aggressive 75 bps amid higher-than-expected US inflation print at 8.6%.
Moreover, elevated crude oil prices and expectations of further rate hikes by the RBI hurt market sentiment. The 10- year G-sec traded in the range of 7.56-7.61% during the week.
Towards the end of the month, fears of a potential global slowdown took hold, with investors moving to safe-haven assets. Following the trajectory of UST yields, the 10-year G-sec eased 12 bps to close at 7.43% on June 20. A fall in crude oil prices and overnight index swap (OIS) rates improved market sentiment. The benchmark traded in the range of 7.40-48% in the last week and closed the month at 7.44%.
June Jitters
One-month view
In July, yields are likely to be impacted by rising crude oil prices, the RBI’s stance and forward guidance, inflation numbers, the Fed’s rate hike action, rupee-dollar dynamics, rising global interest rates, foreign portfolio investor (FPI) flows, investor appetite at G-sec auctions, and announcements of open market operation (OMOs).
Three-month view
For the three months through September, yields are likely to be dictated by movement in crude oil prices due to geopolitical tensions, the Federal Open Market Committee (FOMC)’s decision on bank rates, the MPC’s action on rates, trends in India’s gross domestic product (GDP) growth, FPI flows, passive products such as exchange traded funds (ETFs) to be launched next month, 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. The outlook is arrived at by combining statistical models with invaluable inputs from our experts. It also incorporates our view on policy expectations, macroeconomic outlook, key events (local and global) and market factors (liquidity and demand/supply).
CRISIL’s outlook
Benchmark June 30,
2022 (A) July 31,
2022 (P) Septem- ber 30, 2022 (P) 10-year G-sec
yield* 7.44% 7.40%-
7.60% 7.50%- 7.70%
10-year SDL yield 7.79% 7.75%-
7.95% 7.90%- 8.10%
10-year corporate
bond yield 7.81% 7.80%-
8.00% 7.95%- 8.15%
A: Actual; F: Forecast
*6.54% GS 2032 as the 10-year G-sec benchmark
On interest rates
Source: CRISIL Research
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 elevated oil prices, high inflation and slowing global growth. That said, growth will receive support from improving growth in contact-based services and normal monsoon.
• GDP growth slowed to 4.1% on-year in the fourth quarter of fiscal 2022 from 5.4% previous quarter.
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.
• The impact of this year’s heatwave on domestic food pro- duction, coupled with elevated international commodity prices and input costs, will put a broad-based pressure on domestic inflation.
• CPI inflation moderated to 7% in May compared with 7.8%
previous month.
RBI’s monetary policy • We expect RBI to raise repo rate by atleast 75 bps in the remainder of this fiscal.
• Hikes are expected to be frontloaded in the first half of this fiscal, given that inflationary pressures and global head- winds at high at present. Further pace of hikes, however, will depend on inflation trajectory in second half and how the US Fed calibrates its moves.
• The MPC raised policy rates by a cumulative 90 bps in fiscal 2023 so far. The pace of hike increased to 50 bps in June policy meeting compared with 40 bps in May.
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 2 months of fiscal 2023, fiscal deficit ended at 12.3% of full-year target, compared with 8.2% in the same period last year. Gross market borrowing has been Rs. 3.57 lakh crore during this fiscal until June, compared with Rs.
3.06 lakh crore in the same period last year
Crude oil prices • CRISIL Research expects crude prices to average $105-110 per barrel in fiscal 2023 compared with $80 per barrel last year.
• Brent crude oil prices averaged $120.1 per barrel in June, 6.9% higher on-month and 64.3% higher on-year.
Factors influencing outlook
1Provisional estimate
Research
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.
• Surging international commodity prices, in particular crude oil, will push up import growth. Export growth will slow with slowing global growth
• CAD reduced to 1.5% of GDP in fourth quarter of fiscal 2022 compared with 2.6% of GDP previous quarter.
US Federal Reserve’s
stance • S&P Global expects the Fed to hike policy rate by another 200 bps, bringing it to 3.50%-3.75% by mid-2023.
• The Fed increased policy rate by 75 bps to 1.5-1.75% in June policy meeting. Cumulatively, fed rate has increased by 150 bps in 2022 so far.
Liquidity indicators - Demand & Supply
Supply side
• RBI introduced two new G-sec papers in 2 year and 5 year maturity in June.
Demand side
• Demand for sovereign securities has increased due to limited supply in AAA rated corporate bonds
- Call rates/LAF (liquidity adjustment facility)
• Interbank call money rates hovered mostly below the RBI’s repo rate of 4.9% in June amid comfortable liquidity in the system. The RBI intermittently conducted variable rate reverse repo auctions during the month to absorb excess liquidity.
Research
The yield on the 10-year benchmark G-sec remained flattish at 2 bps on-month in June, closing at 7.44%. Yields on corporate bonds (10-year PSU FI) rose 10 bps to 7.81%, while those on SDLs were flat, closing at 7.79%, led by higher demand and lower supply in weekly auctions.
Note: 6.54% GS 2032 is the 10-year G-sec benchmark Source: CRISIL Research
Source: CRISIL Research
June at a glance
Source: CRISIL Research
Spreads widen for corporate bonds but remain flattish for SDLs over 10-year benchmark G-sec
10-year benchmark yields remain flattish 10-year benchmark G-sec yield
For the 10-year benchmark SDL, spread over the benchmark G-sec remained flattish with -2 bps over the past month, closing at 35 bps. Meanwhile, the 10-year AAA-rated public-sector corporate bond spread widened by 8 bps to 37 bps. The 12-month average spreads for the 10-year benchmark SDL and corporate bond over G-sec were 48 bps and 43 bps, respectively.
Repo rate hike
of 50 bps US CPI print
at 8.6% Profit-booking ahead
of G-sec auction Softening in yields as investors move to safe-haven assets
US Fed hiked interest rates by 75 bps
Sharp hike in UST, May CPI at 7.04%
RBI conducted a switch
auction worth Rs 12,000 crore Fall in oil prices as US moves to cut fuel tax
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
SDL spreads Corporate bond spreads 7.25%
7.30%
7.35%
7.40%
7.45%
7.50%
7.55%
7.60%
7.65%
31-MAY-22 01-JUN-22 02-JUN-22 03-JUN-22 04-JUN-22 05-JUN-22 06-JUN-22 07-JUN-22 08-JUN-22 09-JUN-22 10-JUN-22 11-JUN-22 12-JUN-22 13-JUN-22 14-JUN-22 15-JUN-22 16-JUN-22 17-JUN-22 18-JUN-22 19-JUN-22 20-JUN-22 21-JUN-22 22-JUN-22 23-JUN-22 24-JUN-22 25-JUN-22 26-JUN-22 27-JUN-22 28-JUN-22 29-JUN-22 30-JUN-22
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
Research
The 10-year UST yield closed June at 2.98%, 13 bps higher than the May close of 2.85%, driven by the FOMC’s 75 bps rate hike — the biggest since 1994. The monthly average spread between the domestic 10-year benchmark G-sec yield and the 10-year UST yield narrowed to 4.34% from 4.45%.
Spread over UST narrows
Source: CRISIL Research
The average spread between the 10-year benchmark G-sec yield and the tri-party repo (TREPS) narrowed to ~298 bps in June from ~327 bps in May. The 12-month average spread stood at ~313 bps.
Term premium between 10-year benchmark G-sec and TREPS narrows
Source: CRISIL Research
Systemic liquidity remains in surplus
Source: CRISIL Research Note: * Net liquidity is calculated as repo + MSF + standing
liquidity facility - reverse repo
In June, average systemic liquidity was ~Rs 2.93 lakh crore, lower than the previous month’s
~Rs 4.35 lakh crore. Daily surplus liquidity reached a high of ~Rs 3.80 lakh crore during the month. Average surplus for the past 12 months stood at ~Rs 6.36 lakh crore. The 50-bps hike in the repo rate by the RBI in June can be seen as a step towards aligning the RBI’s liquidity management with market conditions.
Net liquidity injected [injection (+)/absorption (-)]* (Rs Crore)
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%
-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
Net liquidity injected [injection (+)/absorption (-)] *
Research
FPIs continue to pull out of debt
In June, net FPI outflow was Rs 51,422 crore, compared with Rs 36,518 crore in May.
Debt and equities saw outflows of Rs 1,414 crore and Rs 50,203 crore, respectively.
The debt market may not attract flows in the near term, given the headwinds from crude oil price fluctuations amid heightened geopolitical uncertainty, and rate tightening by the Fed.
Source: CRISIL Research
(Rs crore)
Source: CRISIL Research
Average trading volume
Trading volumes for SDLs and G-secs fell
~8% and 20%, respectively, while those for Treasury bills (T-bills) and corporate bonds increased ~33% and ~16%, respectively.
Trading volumes for commercial papers (CPs) and certificates of deposit (CDs) decreased ~13% and ~29%, respectively.
Monthly average trading volume (Rs crore)
Benchmark spreads over G-sec narrowed
Spreads over G-sec*
Rating
category Date PSUs/
corporates NBFCs Housing finance companies
AAA 31-May-22 0.05% 0.38% 0.26%
30-Jun-22 0.14% 0.48% 0.38%
AA+ 31-May-22 0.84% 1.66% 0.91%
30-Jun-22 0.94% 1.75% 0.97%
AA 31-May-22 1.51% 4.18% 3.25%
30-Jun-22 1.61% 4.24% 3.37%
AA- 31-May-22 2.20% 4.80% 4.43%
30-Jun-22 2.26% 4.90% 4.56%
Note: *Spreads are for five-year securities over annualised G-sec yield Source: CRISIL Research
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
Apr-22 May-22 Jun-22 12 Month- Avg
SDL TBILL CD
CP Corporate Bond G-sec (R.H.S.)
(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
(1,558) 983
(11,799) 5,194
(3,073) (5,632)
(4,439)
(5,506) (1,414)
-30000 -25000 -20000 -15000 -10000 -5000 0 5000 10000 15000
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
Research
Key downgrades and upgrades in March 2022
Downgrades
Issuer name Old rating New rating
Digikredit Finance Pvt Ltd CRISIL BBB- CRISIL BB+
Sadbhav Engineering Ltd IND BBB+ IND BB+
Upgrades
Issuer name Old rating New rating
Sundaram Home Finance [ICRA]AA+ [ICRA]AAA
Kogta Financial (India) Ltd [ICRA]A- [ICRA]A
Bank of Maharashtra [ICRA]AA- [ICRA]AA
Svatantra Microfin Pvt Ltd CARE A CARE AA-
Indian Receivable Trust CARE A(SO) CARE AA-(SO)
AU Small Finance Bank Ltd CRISIL AA- CRISIL AA
Indian Overseas Bank CRISIL A+ CRISIL AA-
Aptus Value Housing Finance India Ltd CARE A+ CARE AA-
Aptus Finance India Pvt Ltd CARE A+ CARE AA-
SK Finance Ltd CRISIL AA-(CE) CRISIL AA(CE)
Vistaar Financial Services Pvt Ltd [ICRA]A- [ICRA]A
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