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CRISIL’s outlook on near-term rates
March 2022
Research
Analytical contacts
Sourabh Prakash
Senior Research Analyst, Funds & Fixed Income Research [email protected]
Yadnesh Tari
Research Analyst, Funds & Fixed Income Research [email protected]
Bhoomika Dattani
Manager, Funds & Fixed Income Research [email protected]
Dharmakirti Joshi Chief Economist
Dipti Deshpande Principal Economist
Pankhuri Tandon Economist
Contents
Busy February 3
Factors influencing the outlook 4
February at a glance 6
Research
The yield on the 10-year benchmark government security (G-sec; 6.54% GS 2032) opened the month at 6.82% and closed at 6.76%, within CRISIL’s forecast range of 6.70-6.90% and up 6 basis points (bps) from the January close of 6.70%.
In the first week, the yield spurted following the budget largely due to two factors: first, the gross borrowing announced for fiscal 2023 was significantly higher than expected and, second, there was no announcement on inclusion of Indian government bonds in global bond indices. Trading volume remained low as participants were wary of taking positions ahead of the weekly auction. The yield stayed high through the week and closed the week even weaker at 6.89%, the month’s high.
In the second week, bonds traded with a positive bias as the Reserve Bank of India (RBI) cancelled the next G-sec auction, which was scheduled for February 11, 2022. The decision of the RBI Monetary Policy Committee (MPC) to retain accommodative stance for longer came as a surprise to market participants. Yields softened during the week, with the 10-year benchmark paper closing at 6.71%.
The market started the third week on a bearish note due to a sharp spike in US treasury yields and an overnight surge in crude oil prices amid heightening geopolitical tensions between Russia and Ukraine. A higher-than-expected CPI print of 6.01% for January supported the hardening. On the other hand, cancellation of the second weekly auction — indicating the government’s comfortable cash balance position — led to a fall in yields. News of initial public offer (IPO) of Life Insurance Corporation of India (LIC) also added positivity. The benchmark yield remained in the 6.67- 6.69% range through the week.
The last week of the month saw yields surging and the benchmark hitting 6.76% as Russia declared war on Ukraine.
Following the attack, Brent crude price crossed $100/barrel and reached a high of $105.54/barrel intra-day on February 24th. Fears of foreign capital outflows to safe-haven assets also weighed on the yields. The benchmark paper closed the month at 6.76%.
Busy February
One-month view
In March, yields are likely to be guided by developments in the Russia-Ukraine conflict, crude oil prices, foreign portfolio investor (FPI) flows, outcome of the meeting of the US Federal Reserve’s Federal Open Market Committee, inflation outlook, investor appetite at G-sec auctions, further announcements of variable rate reverse repo (VRRR) auctions, global interest rates, any possible resurgence of Covid-19 cases, and recovery in economic activity amid the decline in daily affliction rate.
Three-month view
During the three months through May, the factors that will dictate the yields are the turn of the Russia-Ukraine, crude oil prices, the MPC’s decision on rates and measures taken to manage surplus liquidity, the Fed’s tapering of bond purchases, domestic 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. The outlook is arrived at by combining statistical models with invaluable inputs from our experts. It also incorporates our view on policy expectations,
CRISIL’s outlook
Benchmark February 28, 2021 (A)
March 31,
2022 (F) May 31, 2022 (F)
10-year G-sec
yield* 6.76% 6.80%-
7.00% 6.90%- 7.10%
10-year SDL yield 7.12% 7.20%-
7.40% 7.47%- 7.67%
10-year corporate
bond yield 7.05% 7.20%-
7.40% 7.47%- 7.67%
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 7.8% on-year in fiscal 2023 compared with 8.9%1 in current year.
• Growth will continue to be supported by investment, while consumption will revive only gradually
• GDP growth slowed to 5.4% on-year in the third quarter of fiscal 2022 from 8.5% previous quarter.
Consumer price index
(CPI) inflation • We expect consumer price index (CPI)-linked inflation to av- erage 5.4% in fiscal 2023 compared with an expected 5.5%
in current fiscal
• Surging international commodity prices will increase input costs for industry and agriculture. We expect these cost pressures to be passed to retail prices to a greater extent next fiscal as demand recovery strengthens
• CPI inflation rose for 4th consecutive month, to 6% in Janu- ary compared with 5.7% previous month
RBI’s monetary policy • We expect repo rate to rise 50-75 basis points in fiscal 2023
• Rising risks from inflation and external shocks will con- strain monetary policy space to support growth
• The MPC kept policy rates unchanged (repo rate at 4.0%, reverse repo at 3.35% and marginal standing facility at 4.25%), and maintained its accommodative stance in Feb- ruary.
Fiscal health • The budget has targeted a reduction in centre’s fiscal deficit to 6.4% of GDP next fiscal from 6.9% (revised estimate) in the current fiscal.
• Reduction in fiscal deficit will be driven by lower revenue expenditure. Further reduction would be limited by rising capital expenditure and slower revenue growth in fiscal 2023 relative to current fiscal.
• Gross market borrowing is projected to rise to Rs. 14.95 lakh crore next fiscal from Rs. 10.47 lakh crore in current year.
Crude oil prices • CRISIL Research expects crude prices to average $88-93 per barrel in calendar year 2022, compared with an average of
$70.4 per barrel in 2021.
• Brent crude oil prices surged to $95.8 per barrel average in February, 12% higher on-month and 54.6% higher on-year.
Factors influencing outlook
1Second Advance Estimate by National Statistical Office
Research
Economic parameter Our view Impact on
yields Current account
balance • We expect current account deficit to rise to 2.2% of GDP in fiscal 2023 compared with an expected 1.6% of GDP in fiscal 2022.
• Rising commodity prices and recovering domestic demand is expected to push up import growth. Export growth may slow relative to last year, as global growth is seen slowing
• Current account recorded a deficit of 1.3% of GDP in the second quarter of this fiscal compared with a surplus of 0.9% of GDP previous quarter
US Federal Reserve’s
stance • S&P Global expects 6 rate hikes by the US Federal Reserve in 2022, starting in March.
• Fresh asset purchases under quantitative easing will end in March 2022. S&P Global expects Fed to start reducing balance sheet from 2023.
Liquidity indicators - Demand & Supply
Supply side
• Fiscal deficit widened because of the pandemic’s impact on the economy. To bridge the deficit, next fiscal the government will gross borrow Rs 14.95 lakh crore. Net borrowing is seen at Rs 11.19 lakh crore. Sovereign green bonds will be part of the gross borrowing
• In early February, the RBI cancelled G-sec auctions worth 39,000 crore
• The government announced decision to float LIC’s IPO Demand side
• The RBI conducted VRRR auctions of Rs 33.5 lakh crore to absorb liquidity in the system. Going forward, the RBI’s such liquidity measures are expected to be in line with its monetary policy
• CDs issuances crossed ~Rs 60,000 crores in February due to pick up in economic activities and demand for funds from banking system
• Increased demand for corporate bonds from pension funds to fulfil their investment limits
- Call rates/LAF (liquidity adjustment facility)
• Interbank call money rates mostly remained below the RBI’s repo rate of 4% in February amid comfortable liquidity in the system. The central bank intermittently conducted VRRR auctions in the month to absorb the excess liquidity
Research
Yields on corporate bonds (10-year PSU FI) softened 5 bps to close at 7.05% and those on SDLs 12 bps to 7.12%, compared with 7.10%
and 7.23% the previous month.
Note: 6.54% GS 2032 movement Source: CRISIL Research
Source: CRISIL Research
February at a glance
Source: CRISIL Research
Spread narrows for SDLs and corporate bonds 10-year benchmark yield softens
10-year G-sec benchmark yields
For the 10-year benchmark SDL, the spread over the benchmark G-Sec narrowed 19 bps and that over 10-year AAA-rated public-sector corporate bond yields shrank 12 bps over the past month to 35 bps and 29 bps, respectively(lowest in the last 5 years). The 12-month average spread between the yields on the 10-year benchmark SDL was 62 bps and corporate bonds over that of G-secs was 60 bps.
Cancellation of G-sec auction
Higher-than-expected CPI print for January
Brent crude at eight- year high
Gross market borrowing for FY23 estimated at Rs 14.95 lakh crore
Cancellation of second G-sec auction US Treasury reaching a high of 2.05%
Heightened geopolitical tensions after Russia’s attack on Ukraine
6.60%
6.65%
6.70%
6.75%
6.80%
6.85%
6.90%
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%
28-Feb-13 31-Aug-13 28-Feb-14 31-Aug-14 28-Feb-15 31-Aug-15 29-Feb-16 31-Aug-16 28-Feb-17 31-Aug-17 28-Feb-18 31-Aug-18 28-Feb-19 31-Aug-19 29-Feb-20 31-Aug-20 28-Feb-21 31-Aug-21 28-Feb-22
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 1.83% in February, 4 bps higher than the January close of 1.79%. Monthly average spread between the domestic 10-year benchmark G-Sec yield and the 10-year US Treasury yield narrowed to 4.82% from 4.84%.
Spread over US Treasury narrows
Source: CRISIL Research
Average spread between the 10-year
benchmark G-Sec yield and the tri-party repo (TREPS) widened to ~340 bps in February from ~303 bps in January. The 12-month average spread stood at ~299 bps.
Term premium between 10-year benchmark G-Sec and TREPS widens
Source: CRISIL Research
Systemic liquidity remains in surplus
In February, average surplus systemic liquidity was ~Rs 6.88 lakh crore, higher than the previous month’s ~Rs 6.29 lakh crore.
Daily surplus liquidity hit a low of Rs ~5.98 lakh crore during the month due to extensive VRRR operations. Average surplus for the past 12 months stood at ~Rs 6.33 lakh crore.
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
Research
FPI investments in debt saw outflow
In February, total FPI net outflow was Rs 38,068 crore compared with net outflow of Rs 28,526 crore in January. The debt segment saw a net outflow of Rs 3,073 crore and equities, Rs 35,592 crore.
Source: CRISIL Research
(Rs crore)
Source: CRISIL Research
Average trading volume
Trading volume in SDLs increased
~12% on month, while that in Treasury bills and G-Secs increased ~13% and
~35%, respectively. Commercial papers, however, saw a ~15% fall. In certificates of deposit and corporate bonds, volume increased a considerable ~75% and ~23%, respectively.
Monthly average trading volume (Rs crore)
Benchmark spreads over G-sec narrow amidst lower corporate bond issuances
Spreads over G-sec*
Rating
category Date PSUs/
corporates NBFCs Housing finance companies
AAA 31-Jan-22 0.18% 0.71% 0.37%
28-Feb-22 0.07% 0.57% 0.22%
AA+ 31-Jan-22 1.34% 2.08% 1.14%
28-Feb-22 1.09% 1.93% 1.09%
AA 31-Jan-22 1.62% 4.77% 3.43%
28-Feb-22 1.57% 4.59% 3.29%
AA- 31-Jan-22 2.53% 5.39% 4.54%
28-Feb-22 2.33% 5.20% 4.39%
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
Dec-21 Jan-22 Feb-22 12 Month- Avg
SDL TBILL CD
CP Corporate Bond G-sec (R.H.S.)
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
(1,558) 983
(11,799) 5,194
(3,073)
-70000 -60000 -50000 -40000 -30000 -20000 -10000 0 10000 20000
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 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22
Research
Key downgrades and upgrades in February 2022
Downgrades
Issuer name Old rating New rating
Xander Finance Pvt. Ltd. [ICRA]A [ICRA]BBB+
Upgrades
Issuer name Old rating New rating
Ess Kay Fincorp Ltd CRISIL A CRISIL A+
Jodhpur Wind Farms Pvt Ltd CRISIL AA(CE) CRISIL AA+(CE)
JSW Energy Ltd IND AA- IND AA
Latur Renewable Pvt Ltd CRISIL AA(CE) CRISIL AA+(CE)
Mahaveer Finance (India) Ltd CRISIL BBB- CRISIL BBB
Motilal Oswal Finvest Ltd CRISIL AA- CRISIL AA
Motilal Oswal Home Finance Ltd CRISIL AA- CRISIL AA
Patil Rail Infrastructure Pvt Ltd CARE BBB+ CARE A-
Svatantra Microfin Pvt Ltd [ICRA]A- [ICRA]A
Torrent Power Ltd CRISIL AA CRISIL AA+
TVS Credit Services Ltd BWR AA- BWR AA
Vedanta Ltd CRISIL AA- CRISIL AA
Vodafone Idea Ltd CARE B- CARE B+
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