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Debt Market Update - March 2017

Key Events

  • India GDP : India's economic growth slowed marginally to 7% in October-December from 7.4% in the previous quarter, government data showed, putting to rest the fear that India's ongoing cash crunch following demonetization would take a big bite out of the economy. Gross value added (GVA) was 6.6%, with the difference explained by robust indirect taxes and reining in of subsidies.
  • The CPI inflation eased to a series-low of 3.2% in January 2017 (+5.7% in January 2016 from 3.4% in December 2016 (+5.6% in December 2015), thanks to a slide in food and vegetable prices.
  • WPI inflation rose to 5.2%(30-month high) in January 2017 from 3.4% in December 2016 , reflecting rising commodity prices. .
  • Foreign direct investment (FDI) in India grew 18 % during 2016 to touch $46 billion, data released by the Department of Industrial Policy and Promotion (DIPP) showed.
  • The RBI kept the repo rate unchanged at 6.25% in its bi-monthly monetary policy review. The reverse repo rate also remains unchanged at 5.75%. The RBI further said that the expected GDP growth is 6.9% for the 2016-17 fiscal. .
  • The policy saw the central bank change its  stance from accommodative to neutral, which is seen as a hawkish move. 
  • India's industrial production declined 0.4% in December 2016, after having registered a 5.7% growth in the preceding month. Output dropped in December due to a 2% decline in manufacturing sector production. .
  • India's merchandize  exports expanded for a fifth straight month in January 2017, rising 4.32% to $22.1 billion thanks to increase in shipments of engineering and petroleum products, official data showed. Imports also rose by 10.7%, leading to the trade deficit expanding to $9.84 billion .
  • Federal Reserve officials have said they may need to raise interest rates "fairly soon"  if the economy stays strong, minutes of their meeting show.


  • The month of February gave a big shock to the bond markets when RBI monetary policy changed stance to neutral from accommodative.
  • The falling rates cycle has got extended as the RBI wants to see the headline inflation at 4% in H2 FY 2018 before they move ahead in the easing cycle.
  • Bond yields sold off sharply especially in the mid to long bonds curve. The 10 yr benchmark is likely to trade in the band of 6.75% -7.00% in the near future.
  • We have a US FED policy meet in mid March which will keep the market participants on the toes. Market is predicting a 80% probability of a 25 bps hike and we believe that this event is already discounted in the current market yields. The 10 yr US treasury remains stable between 2.40-2.50 and is down 12 bps from the peak.
  • We have UP election results in mid March. If the outcome is in favor of the NDA then it can add to the sentiments of the equity bull markets and therefore INR and rates .
  • Historically, the 10 yr gilt trades at ~100 bps over inflation. This is now at 250 bps (assuming average CPI of about 4.5%). Thus, the real interest rates are higher than average which is much better for savers.
  • We expect that investors may prefer MF investments over FD; and financial assets over real assets since they will deliver better risk /liquidity/tax adjusted return .
  • Easy liquidity and chase of carry has squeezed the credit spread and made sovereign cheap and therefore duration should not be completely ignored despite being volatile. 
  • The curve is likely to remain steep till we have clarity on monetary policy stance. Therefore long term investors will be rewarded suitably on a risk adjusted basis.