Interest rates

RateView : CRISIL's outlook on near-term rates


Executive summary


Yields on government securities (G-secs) remained range bound in October. Yield on the 10-year benchmark G-sec hit an end-of-day low of 6.61% and an end-of-day high of 6.73% before closing the month at 6.65%, compared with September’s closing of 6.70%. This was well within CRISIL’s forecast range of 6.55-6.75%.


In the first week of the month, the central government sent out a strong signal that the fiscal deficit target would be met by keeping the borrowing plan for the second half of fiscal 2020 in line with the annual budgeted estimate. This, together with a fall in US Treasury yields and a drop in oil prices, pushed yields down. Yields slid further as the Monetary Policy Committee (MPC) cut the repo rate by 25 basis points (bps) and maintained an accommodative stance in its October 4 meet. However, gains were capped as the MPC slashed India’s gross domestic product (GDP) growth projection for fiscal 2020 from 6.9% to 6.1%.


The following weeks saw a negative impact on G-secs given a bevy of factors such as reduction in the GDP growth projections of Moody’s and the IMF (to 5.8% from 6.2% and to 6.1% from 7%, respectively), a higher CPI print, imminent finalisation of Brexit deal, rise in oil prices, etc, which led to some hardening in yields. Inflation based on the consumer price index (CPI) printed at 3.9% for September, up from 3.21% for August.


The negative sentiments were capped by some positive events, such as a 25 bps cut by the Federal Open Market Committee and expectations of some easing in the US-China trade war. The old 10-year benchmark ended the month at 6.65%, while the new 10-year benchmark (6.45 GS 2029) ended the month at 6.45%.


The month-end spread between corporate bonds and the old 10-year benchmark G-sec (7.26 GS 2029) contracted ~4 bps on-month to ~94 bps. The spread between state development loans (SDLs) and the old 10-year benchmark G-sec widened ~4 bps to ~54 bps. The spread over the new 10-year benchmark was 114 bps for corporate bonds and 74 bps for SDLs.


CRISIL’s view for 6.45 GS 2029 yield is 6.35-6.55% for November-end and 6.50-6.70% for January-end. We expect spreads for SDLs and corporate bonds to be steady over the next three months. The view is on the basis of the fact that most of the possible negative events, such as lower growth projections, have already been factored in.