the market overview - juvlon...
TRANSCRIPT
Note: None of the aforesaid recommendations are based on any assumptions. These are purely for reference and the investors are requested to consult their financial advisors
before investing.
O v e r v i e wThe MarketFixed Income Market Outlook
Average Liquidity Support by RBI
Rs -3.39 trillion Includes: LAF, MSF, SLF & Term Repo
Bank Credit Growth
5.6%
Bank Deposit Growth
12.1%
Money Market
Tenure
Change in basis points (bps)
CD
1M
Change CP Change
3M
6M
12M
Bond Market Change in basis points
Tenure G-Sec ChangeAAA
CBChange
1Y
3Y
5Y
10Y
Macro Economy Data Release
IndicatorLatest
Update
Previous
Update
IIP
GDP
USD/INR
WPI
CPI
Month Overview (as on May 31, 2017)
6.50
6.68
7.00
7.40
0
-12
-16
10
6.53
6.61
6.90
6.66^
5
-17
-13
-30^
7.02
7.26
7.36
7.60
-7
-5
-11
-13
2.7% (Mar)
6.1% (4QFY17)
64.50 (May)
3.85% (Apr)
2.99% (Apr)
1.9% (Feb)
7.0% (3QFY17)
64.25 (Apr)
5.29% (Mar)
3.81% (Mar)
3
4
6
20
6.18
6.36
6.55
6.80
INDICATORS
Credit Markets
Credit Spreads
Credit Spreads as on May 31, 2017
Tenure 6M 1Y 2Y 3Y 5Y 7Y 10Y 15Y
AAA 0.48% 0.63% 0.52% 0.54% 0.34% 0.51% 0.83% 0.20%
AA+ 0.70% 0.90% 0.74% 0.84% 0.70% 0.84% 1.17% 0.55%
AA 0.95% 1.15% 0.99% 1.11% 0.99% 1.13% 1.65% 0.92%
AA- 1.09% 1.30% 1.24% 1.43% 1.32% 1.49% 2.05% 1.41%
A+ 1.35% 1.54% 1.45% 1.72% 1.61% 1.73% 2.39% 1.75%
A 1.52% 1.71% 1.77% 2.04% 1.95% 2.08% 2.64% 2.00%
A- 1.84% 2.03% 2.16% 2.71% 2.55% 2.75% 3.24% 2.66%
LAF – Liquidity Adjustment Facility, MSF – Marginal Standing Facility, SLF – Standing Liquidity Facility, CP - Commercial Paper, CD – Certificate of Deposit, CB – Corporate Bond, IIP – India Industrial Production, CPI – Consumer Price Index, WPI – Wholesale Price Index, CAD – Current Account Deficit, GDP – Gross Domestic Product
Source: CRISIL
Data Source – RBI, Mospi.Nic.in, CRISIL Fixed Income Database, ̂ Yield data of new 10 year bond compared with the old 10 year bond
Credit Ratio
CRISIL's rating actions during fiscal 2017 underscore credit quality of India Inc is gradually recovering. CRISIL's credit ratio for fiscal 2017 was 1.22 times, similar to the 1.29 times seen for fiscal 2016. The improvement was driven by firm commodity prices, stable macros, improving capital structure and lower interest costs. Going forward, CRISIL expect gradual improvement in credit quality to sustain. In all, there were 1,335 upgrades and 1,092 downgrades, during the year. Like last fiscal, upgrades were driven by consumption-linked sectors, while downgrades were led by investment-linked sectors. The impact of demonetisation on credit quality is expected to be transient.
Source: CRISIL
Bank Credit / Deposit Growth
Bank credit growth rose marginally to 5.6% year-on-year on the fortnight ended May 12, 2017 compared with 5.5% as on April 14, 2017. Non-food bank credit rose to Rs 76.29 trillion as on May 12, 2017 compared with outstanding credit of Rs 75.83 trillion as on April 14, 2017. Time deposit growth fell to 10.2% for year ending May 12, 2017 against 10.6% in April 14, 2017. Demand deposits witnessed 31.8% year-on-year growth in the fortnight ended May 12, 2017 compared with 21.1% year-on-year growth in the fortnight ended April 14, 2017. India's M3 money supply rose 7.8% year-on-year on the fortnight ended May 12, 2017 compared with 10.2% a year ago. Reserve money fell 9.4% year-on-year in the week ended May 19, 2017 compared with growth of 14.2% a year ago.
Source: RBI
Our Outlook
Credit ratio in FY 17 has printed at a healthy 1.22 times. This improvement goes on to show that the credit cycle has bottomed out. With the commodity prices being stable, commodity-led businesses and financial companies that were heavily invested in these sectors can witness further improvement. As capacity utilisation is low, we do not expect further investment in capital expenditure, thus, these companies are expected to repay their loans and reduce debt, thereby improving the balance sheet. Credit profile of many corporates has been improving and we have witnessed upgrades in our portfolios of companies engaged in various sectors. Therefore, we feel that economic recovery cycle is well underway, and that the credit market is gradually improving.
Inflation
India's Consumer Price Index (CPI)-based inflation declined to 2.99% in April 2017 from 3.81% in the previous month, driven by dip in food inflation. Food inflation, which has been consistently declining since July 2016, fell to 0.6% in April from 2% in March. Falling inflation in pulses and vegetables caused the decline. Inflation in pulses fell to -15.9% led by 37% increase in production in fiscal 2017. Vegetables inflation was down (to -8.6%) owing to a high base and given expectations of a normal south-west monsoon. Cereals inflation declined to 5.1% from 5.4% - production in this category is estimated to have increased 7% in fiscal 2017.
Fuel inflation slowed in April as the increase in global crude oil prices moderated and the rupee relatively appreciated. Fuel inflation - measured by adding petrol, diesel, fuel and light components – eased to 7.1% in April from 8.3% in March. Within the category, inflation in fuel and light rose to 6.1% from 5.5%, while in petrol and diesel it fell to 10.9% from 19.7%. The relief came from core inflation, which had been sticky for most of fiscal 2017. Core inflation (CPI excluding food, fuel and light) showed a sharp fall – to 4.4% from 5.1% in March – led by decline in the transport and communication segment. But the other measure of core inflation (CPI excluding food, petrol, diesel, fuel and light) also declined – 4.2% from 4.6% - hinting at tempering demand-side pressures.
New data series for the Wholesale Price Index (WPI) with fiscal 2012 as the revised base year against fiscal 2005 was unveiled by the government on May 12, 2017. The revision now aligns these indicators with the GDP which was brought to the 2011-12 base earlier - allowing for meaningful comparisons. WPI inflation for April 2017 was 3.85%, 144 basis points (bps) lower than in March, mainly owing to 5.14% fall in fuel inflation and over 2.16% decline in primary articles inflation. The new series records WPI inflation in fiscal 2017 at 1.7%, which is 200 bps lower than the old (2005) series.
Source: Mospi.nic.in, CCER
Currency in circulation dropped 15.1% year-on-year in the week ended May 19, 2017 against 14.8% growth a year ago. The Reserve Bank of India's (RBI's) liquidity window witnessed net lending of Rs 3.39 trillion in May 2017 against Rs 4.16 trillion in the previous month.
Source: RBI, CRISIL Fixed Income Database
Money Markets
INDICATORS
Liquidity
Spread Market Data in basis points
Tenure AAA AA A
1Y
3Y
5Y
10Y
0.63%
0.54%
0.34%
0.83%
1.15%
1.11%
0.99%
1.65%
1.71%
2.04%
1.95%
2.64%
O v e r v i e wThe MarketFixed Income Market Outlook
Note: None of the aforesaid recommendations are based on any assumptions. These are purely for reference and the investors are requested to consult their financial advisors before investing.
Physical assets
Indian gold prices ended marginally lower to close the month at Rs 28,800 per 10 grams on May 31 vis-à-vis Rs 28,880 per 10 grams on April 30 on the National Commodity & Derivatives Exchange Limited (NCDEX), amid muted demand from local jewelers and a weak global trend.
Source: NCDEX
Government Borrowing
In the Union Budget 2017-18, the government pegged the net market borrowing at Rs 3.48 trillion after taking into account the buyback of Rs 750
Debt ValuationAs our debt valuation index shows, investors can choose Moderate Duration or Dynamic Duration Funds as they may offer better risk-adjusted returns. Long-term investors in debt are recommended to invest in Dynamic Duration Funds as they have flexibility to change duration stance.
The RBI's policy
The Monetary Policy Committee (MPC), during its review meeting on April 6, 2017, left the policy repo rate unchanged at 6.25%, and retained its 'neutral' monetary policy stance. All six members of the committee voted to stay put. In order to also make the Reserve Bank of India's (RBI) liquidity stance consistent with its monetary stance, the policy rate corridor was narrowed from 50 basis points (bps) to 25 bps, bringing the reverse repo rate to 6% and the marginal standing facility (MSF) rate to 6.5%. This will now help to mop up liquidity and correct the recent steep fall in money market rates at the short end, by steering them closer to the repo rate. On inflation, the MPC reaffirmed its consumer price index (CPI)-based inflation target of 4% for the medium term. But now, it has telegraphed a glide path that takes CPI inflation to an average of 5% in the second half of fiscal 2018, and 4.6% in the fourth quarter of fiscal 2019. These can be seen as interim targets in the journey towards 4%.
Source: RBI, CCER
billion in FY18 compared to Rs 4.07 trillion (after cancelling Rs 180 billion of auctions in January 2017) in FY17. The gross market borrowing has been set at Rs 5.8 trillion. The Centre will borrow Rs 3.72 trillion in the first half of FY18, frontloading 64% of its gross market borrowing for the year. Auctions of government securities worth Rs 600 billion are scheduled for June 2017.
Source: Union Budget 2017-18, RBI
INDICATORS
Bond Markets
Current Account India's current account deficit (CAD) widened modestly to $7.9 billion (1.4% of GDP) in the third quarter of fiscal 2017 from $7.1 billion (1.4% of GDP) year-on-year. It was, however, a significant jump from $3.4 billion (0.6% of GDP) in the second quarter. The increase in CAD was owing to a fall in services trade surplus, and net income receipts from abroad. Imports growing faster than exports in information technology (IT), IT enabled services (ITeS) and financial services skewed the services trade balance. However, lower goods trade deficit contained the rise in deficit.
Capital flows (comprising capital account and financial account balance) increased 7.8% year-on-year to $7.4 billion in the third quarter. Capital flows had declined by 53% to $4.3 billion in the previous quarter. The growth in capital flows was driven by loans, financial derivatives, reserve assets, and trade and credit advances. Loans recorded net inflows of $20.4 billion in the third quarter of fiscal 2017, as against an outflow of $0.8 billion a year ago. Net inflows into financial derivatives rose to $3.1 billion from $0.3 billion. Trade and credit advances increased to $3 billion from -$1.8 billion, while reserve assets increased to $1.2 billion from -$4.1 billion.
Source: CCER
Debt Valuation Index considers WPI and CPI over G-Sec Yield, Current Account Balance and Crude Oil Movement for calculation. Equal weights are assigned to each of these parameters for calculating the index.
Debt Valuation Index
Fixed Income Outlook
Government bond prices (gilts) advanced in the month on hopes that the RBI could adopt a softer stance at its policy meeting on June 6-7, 2017. These hopes were built on a sharper-than-expected fall in domestic consumer inflation in April 2017. Prices also rose as bond yields aligned themselves with the yield on the new 10-year benchmark 6.79% 2027 paper, which was auctioned on May 12, 2017 and settled the month at 6.66% yield on May 31, 2017. Yield on the erstwhile 10-year benchmark 6.97%, 2026 bond fell to 6.79% on May 31, 2017 compared with 6.96% on April 28, 2017. Sporadic fall in global crude oil prices and US Treasury yields also led to gains in bond prices. However, further rise in bond prices was capped owing to selling pressure ahead of the weekly gilt auctions. Bond prices also fell as sentiment was dented following lower-than-expected cut-off prices at the weekly debt sale on May 26, 2017.Fixed income market is supported by favourable macro-economic factors such as comfortable current account deficit, fiscal deficit and inflation. Also the government policies are incentivising and making financial savings more attractive than physical savings. Inflation is expected to remain low and undershoot RBI trajectory over the next 6-12 months. Inflation expectations are further eased due to lower Goods and Services Tax (GST), normal monsoon forecast by Indian Metrological Department (IMD) and oil prices to remain subdued. Further, combined fiscal deficit (state and central) and current account deficit are also supportive of fixed income markets. We believe that as India is in such comfortable macro-environment (low current account deficit, fiscal deficit and lower inflation). In this backdrop, we believe high interest rate is not sustainable. Thereby, one may expect for yields to drop further. There is likelihood that interest rates would come down because of three factors: India is a solvent economy, there is no major capital expenditure, and there is real estate deleveraging underway.
Accrual Funds
This fund can dynamically change duration strategy based on market conditions.
These funds are better suited for investors looking for accrual strategy.
Dynamic Duration Funds
FIXED INCOME RECOMMENDATIONS
Our RecommendationFor new allocations we recommend short to medium duration or accrual based funds or dynamically managed funds.
ICICI Prudential Corporate Bond FundICICI Prudential Regular Savings FundICICI Prudential Savings FundICICI Prudential Regular Income Fund(An open ended income fund. Income is not assured and is subject to the availability of distributable surplus)
ICICI Prudential Dynamic Bond FundICICI Prudential Long Term Plan
Short Duration Fund
ICICI Prudential Short Term PlanThis fund maintains short-duration maturity.
Our Outlook
Interbank call money rates remained below the repo rate of 6.25% in the month owing to surplus liquidity in the system. Ample liquidity prompted the RBI to drain away excess funds through regular reverse repo auctions. However, sporadic rise in call rates was seen on outflows towards payment of indirect taxes and as banks borrowed to pay for gilts purchased in a weekly auction.
Source: CRISIL Research
1.69
-6
-4
-2
0
2
4
6
8
May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17
Aggressively in High Duration
High Duration
Moderate Duration
Low Duration
Ultra Low Duration