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Fixed Income Market Update: September 2017

  • During the month, while money market rates remained benign, gilt and corporate bond yields rose on the back of rise in global bond yields, OMO sales and rise in inflation.
  • The ten year gilt benchmark closed the month at 6.66%, 14 bps higher from previous month. The ten year AAA Corporate bond benchmark closed at 7.53%, 8 bps higher than previous month. The five year AAA corporate bond benchmark closed at 7.25%, 3 bps higher as compared to previous month. Ten year SDL spreads remained stable at around 70-75 bps to the new gilt benchmark.
  • 1 year CD rates closed at 6.55%, 8 bps higher than previous month. 1 year T bill yield closed at similar levels at 6.23%. 3 month CD rates closed at 6.18% and 3 month T bill yields fell to 6.07%, 1 bps lower than previous month.
  • Brent Crude oil prices rose during the month to USD 56.5 per barrel on improving demand forecast and expectation of further output cuts. INR depreciated and closed the month at 65.28 as compared to 63.90 the previous month. For the month of September, FIIs turned net sellers in the debt market to the tune of Rs 31,525 cr. During the month RBI removed masala bonds from the total FII limit for corporate bonds thereby freeing up Rs 44000 crore for fresh investments. India’s August trade deficit printed at USD 11.64 billion as compared to USD 11.45 bn in July 2017.
  • The ten yr benchmark US treasury yield rose by 22 bps to 2.33 as the Fed signaled a hawkish policy with one more rate hike expected in by Dec 2017.
  • August WPI data release came at 3.24% as compared to 1.88% in previous month. CPI for August came at 3.36% compared to 2.36% in previous month.
  • July Industrial production (IIP) growth came at 1.2% compared to -0.2% for previous month.
  • Banking system liquidity remained well in surplus mode. RBI conducted Rs. 20,000 crore worth of OMOs of dated g-secs. Banks lent on an average Rs 2.17 Lakh Cr at various RBI liquidity facilities put together.
  • RBI also released govt’s borrowing calendar for the second half of the year. It has remained unchanged at Rs 2.08 lakh crore as per budgeted estimates. However fears of slippage and extra borrowing kept yields on higher side.
  • SEBI released a circular on IRFs to allow imperfect (duration) hedging subject to certain limits.
  • At its Monetary Policy Review held on 4th October, the MPC kept key rates unchanged by voting 5-1 in favour. RBI maintained its neutral stance while reducing the FY18 GVA growth forecast to 6.6%, from 7.3% earlier The SLR has been cut by 50 bps to 19.50%. RBI highlighted concerns on fiscal front cautioning that fiscal slippage can lead to higher inflation. A significant first step has been taken in this policy to address the risk asymmetry in pricing of SDLs of different states where fiscally prudent states do not enjoy much of a premium over fiscally profligate states. To address this, as a beginning RBI would publish High frequency data relating to finances of state governments on its website which can be accessed by investors. With States borrowing ever higher amounts, RBI has also decided to schedule State Loan Auctions on a weekly basis rather than the present fortnightly basis. RBI has also said they would undertake consolidation of SDLs to even out redemption pressures.
  • Gilt yields have risen post policy as a negative reaction to the announcements. The ten year gilt benchmark was trading at 6.72 a day after the policy announcement.

Fixed income market outlook:

  • Banking system liquidity to remain in surplus zone, however the quantum of surplus is expected to be lower than previous month and in a range of Rs 1.5 Lakh to 2 Lakh Cr. There could be further OMO issuances to suck out durable liquidity.
  • Short term Money market rates are expected to remain stable on back of low CD issuance and surplus banking system liquidity. Short term corporate bond yields to remain stable to lower on back on attractive carry and defensive bet.
  • The ten year benchmark may trade in a range of 6.65% to 6.80% in the near term due to supply concerns and rising global bond yields. However as absolute yields look attractive intermittent buying may emerge.

Review of Equity Markets for the month of September 2017

The Indian equity markets were weak in September as shown in table below. FII flows were negative for the second consecutive month (at USD 1.65 Billion)while mutual funds used theweakness to buy (about USD 2.4 Billion, according to Citi estimates). FII flows into EMs as a category were positive however at USD 5.3 Billion for the month (JPM data, till Sep 27). The developed markets globally did better than the emerging markets and the MSCI World Index was up 2.1% while the MSCI EM (USD) index was down 0.5% during the month. The global economy, particularly manufacturing, is seeing strong tailwinds, with strong PMIs. The US Fed announced its balance sheet roll-off, as expected, from October. It starts at USD 10billion a month (USD 6 billion of treasuries, USD 4 billion of mortgage-backed securities), increases @ USD 10 billion every quarter till it reaches USD 50 billion and continues at that pace thereafter.The ECB and the Japanese central bank continue their asset purchases however, and the winding down of the Fed balance sheet should not have an effect in the near term.

The headline CPI inflation rose 3.4% y-o-y in August versus 2.4% in July, above expectations. The main surprise was the sharp jump in core CPI inflation (ex-food & beverage, fuel) to 4.6% from 4.1%, reflecting higher petrol prices, the house rent allowance impact, but also the impact of GST for the second consecutive month.The GDP growth for the first quarter had come in at 5.7% and private sector investment has remained weak. There has been talk of the government relaxing the fiscal deficit target for FY 18 to give a push to the economy. We think that as the government spend is already strong this year compared to that of the last year (probably because the budget was earlier this year), there is little space for the government to increase spending. The private sector currently has low appetite for new projects. Projects only worth Rs. 84,000 crores were announced in the last quarter, which is a several quarter low. However, what the government can do, and is attempting, is the resolution of stalled projects, as nearly 21% of projects being undertaken by the private sector are stalled.

The Rupee weakened 2.1% in the month as net capital flows were negative in equity and were virtually zero in debt. The Dollar Index (DXY) regained its losses and was up marginally in the month. It was driven by a hawkish Fed and hopes of a tax plan getting through the US congress. Crude prices (Brent) strengthened nearly 10% in the month. Gold (-3.2%) and silver (-5.3%) prices weakened as a more hawkish Fed trumped tensions around North Korea.

Export growth picked up to 10.3% y-o-y in August, from 3.9% y-o-y in July, but imports accelerated even further at 21% y-o-y, widening the trade deficit.The CRB index of raw industrials was down 1.25%. Copper was down 4.5% and Aluminium and zinc virtually flat. Iron ore however, was down 21% as inventories in China ports remained high. Overall fundamentals for metals however, remained supportive i.e. a low level of inventories and strong global growth.

While the economic growth has been moderate, consumer sentiment is holding up, at least in the automobile sector. Domestic PVs witnessed double digit growth on account of inventory built up for upcoming festive season and better traction from retail sales. Domestic 2Ws registered double-digit growth, led by strong rural demand and growth in scooters.MHCVs saw more than 20% growth despite muted bus sales, owing to strong growth in cargo segment. Strong growth was driven by healthy freight rates, higher sales from infra sector and pent up demand. Finally, tractor demand has shown a growth of double digits in the first half of the year.

With the monsoon season over, the cumulative rainfall for the season was 5% less than normal. This has been considered to be quite satisfactory by the IMD with only 6 met regions witnessing less than normal monsoon. These are Eastern and Western UP, Haryana, Chandigarh, Delhi, Punjab, Eastern Madhya Pradesh and Vidarbha. Some of them have good access to irrigation facilities. The impact on cropping progress and output prospects has been mixed. However, overall there are no major concerns on agricultural output as projected output levels for some crops, though lower than that for Kharif 2016 are still higher than that in Kharif 2015. However, reservoir levels overall are lower than this time last year which may have an impact on the rabi crop. In the kharif season, production is expected to be good, except in case of pulses (esp. tur) and oilseeds which may lead to some inflationary pressures.





1 Month (%)

3 Months (%)

6 Months (%)

1 Year (%)

Broad Markets






Nifty 50






S&P BSE Sensex






S&P BSE 100






S&P BSE 200






S&P BSE 500


















Sectoral Performance








2.07 3.30 9.85 8.76

S&P BSE Bankex


-1.51 2.84 10.67 22.59



-0.83 9.63 15.06




-0.92 0.56 4.41 17.76



-3.95 -6.29 5.42 15.50



2.57 -4.95 -11.92 -16.65



2.11 19.25 14.90 38.92

S&P BSE Oil & Gas


-2.21 12.42 9.43 30.45



-3.74 2.58 -3.19 11.52

S&P BSE Teck


-1.78 1.52 -2.84 -0.41

*Performance for less than one year are absolute returns.

Source:MFI Explorer