Interest rates

RateView : CRISIL's outlook on near-term rates


Executive summary


Yields on government securities (G-secs) oscillated wider than expected in September, in reaction to several developments - some positive, some negative. Yield on the 10-year benchmark G-sec hit a low of 6.49% and a high of 6.87%, before closing the month at 6.70%, compared with August’s closing of 6.56% and outside CRISIL’s forecast range of 6.40-6.60%.


In the first week of the month, expectations of a rate cut in theupcoming Monetary Policy Committee (MPC) meet spurted after thegross domestic product (GDP) growth rate printed at 5% for the firstquarter of fiscal 2020. This pushed yields down. Gains were, however,capped as speculation over possible fiscal measures impactinggovernment finances, rupee depreciation, and a rise in the UStreasury yields increased caution among investors.


The Consumer Price Index (CPI) print, though marginally up onmonth, was within the Reserve Bank of India’s (RBI) medium-term target of 4%, substantiating expectations of a rate cut. An uptick in the Index of Industrial Production (IIP) also added to the cheer.


Mid-month, gilts suffered an oil supply shock triggered by an attack on two Saudi oil installations, which disrupted 5% of the global oil supply, pushing crude oil prices up as much as 11%. Prices reversed soon after, though, on reports of supply resumption.


In yet another blow to the G-sec market, the government, in a surprise move to boost the economy, cut the corporate tax rate to 25%. This escalated fiscal concerns as tax cuts would cause an additional fiscal burden of Rs 1.45 trillion.


Towards the end of the month, the market remained guarded, awaiting the release of the borrowing calendar for the second half of the year.


The spread between corporate bonds and the 10-year benchmark G-sec expanded ~2 basis points (bps) on-month. The current spread of corporate bonds is ~98 bps over G-sec. The spread between state development loans (SDLs) and the 10-year benchmark G-sec contracted ~9 bps to ~50 bps.


CRISIL’s view for 10-year G-sec yield is 6.55% to 6.75% for Octoberend and 6.60% to 6.80% for December-end. We expect spreads for SDLs and corporate bonds to be steady over the next three months.