During the month of March 2016 yield on the new 10-year benchmark (7.59% GoI 2026) ended the month at 7.46% down by 16 bps over the previous month end. The yield on old 10-year benchmark Government bond (7.72% GoI 2025) ended at 7.69% down by 10 bps for the month. The yield on 10-year AAA Corporate Bond ended the month at 8.26% as against 8.62% at the end of February 2016. Thus, corporate bond spreads during the month narrowed to 66 bps as against 85 bps in the previous month.
Liquidity conditions continued to remain negative during the month of March 2016. As against ~Rs.1,61,350 crs of average liquidity net injected by RBI during the month of February through various sources (Liquidity Adjustment Facility, export refinance, marginal standing facility and term repos/reverse repos), ~Rs.1,96,503 crs of liquidity was net injected by RBI during the month of March. The overnight rate ended at 9%, as against 7.05% at end February 2016.
The INR appreciated to 66.36 against the US dollar as compared to 68.42 at the end of previous month. The net FII investment in equities & debt was an inflow of US$ 6.09 billion in March 2016 against an outflow of US$ 2.8 billion in February 2016.
The annual rate of retail inflation, CPI came in at ~5.2% YoY in February 2016, down from 5.7% in January 2016 largely due to moderation in food prices. However, wholesale inflation continued to remain in negative territory as WPI stood at -0.91% (provisional) for the month of February, 2016 (over January, 2015) as compared to -0.90% for the previous month and -2.17% during the corresponding month of the previous year.
In the credit policy review of April 2016, RBI cut the repo rate by 25 bps from 6.75% to 6.5% and in an unexpected move narrowed the policy rate corridor from +/-100 bps to +/- 50 bps. In a major development RBI also announced changes in its liquidity framework wherein systemic liquidity would be progressively improved from a deficit of 1% of Net Demand Time Liabilities (NDTL) to a position closer to neutral.
Outlook
While the repo rate cut by RBI was along expected lines, the proposed changes in liquidity framework are a significant policy regime shift which should have material positive impact on yields going forward.
RBI has reaffirmed that the stance of monetary policy will remain accommodative. The introduction of marginal cost of funds based lending rate (MCLR), reduction in small savings rates and the changes in liquidity management framework will improve monetary policy transmission and magnify the impact of rate cut. Additionally, low inflation and benign inflation outlook, falling fiscal deficit and low Current Account Deficit (CAD) are all supportive of lower yields.
As highlighted repeatedly over the past several months or so, we believe there is merit in adding duration to one’s fixed income portfolio.
Source for various data points: Bloomberg, Reuters, www.sebi.gov.in, www.rbi.org.in and Central Statistics Office (CSO).
Liquidity conditions continued to remain negative during the month of March 2016. As against ~Rs.1,61,350 crs of average liquidity net injected by RBI during the month of February through various sources (Liquidity Adjustment Facility, export refinance, marginal standing facility and term repos/reverse repos), ~Rs.1,96,503 crs of liquidity was net injected by RBI during the month of March. The overnight rate ended at 9%, as against 7.05% at end February 2016.
The INR appreciated to 66.36 against the US dollar as compared to 68.42 at the end of previous month. The net FII investment in equities & debt was an inflow of US$ 6.09 billion in March 2016 against an outflow of US$ 2.8 billion in February 2016.
The annual rate of retail inflation, CPI came in at ~5.2% YoY in February 2016, down from 5.7% in January 2016 largely due to moderation in food prices. However, wholesale inflation continued to remain in negative territory as WPI stood at -0.91% (provisional) for the month of February, 2016 (over January, 2015) as compared to -0.90% for the previous month and -2.17% during the corresponding month of the previous year.
In the credit policy review of April 2016, RBI cut the repo rate by 25 bps from 6.75% to 6.5% and in an unexpected move narrowed the policy rate corridor from +/-100 bps to +/- 50 bps. In a major development RBI also announced changes in its liquidity framework wherein systemic liquidity would be progressively improved from a deficit of 1% of Net Demand Time Liabilities (NDTL) to a position closer to neutral.
Outlook
While the repo rate cut by RBI was along expected lines, the proposed changes in liquidity framework are a significant policy regime shift which should have material positive impact on yields going forward.
RBI has reaffirmed that the stance of monetary policy will remain accommodative. The introduction of marginal cost of funds based lending rate (MCLR), reduction in small savings rates and the changes in liquidity management framework will improve monetary policy transmission and magnify the impact of rate cut. Additionally, low inflation and benign inflation outlook, falling fiscal deficit and low Current Account Deficit (CAD) are all supportive of lower yields.
As highlighted repeatedly over the past several months or so, we believe there is merit in adding duration to one’s fixed income portfolio.
Source for various data points: Bloomberg, Reuters, www.sebi.gov.in, www.rbi.org.in and Central Statistics Office (CSO).
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