Interest rates


RateView : CRISIL's outlook on near-term rates

April 2020


Moody March

Government security (G-sec) yields swung wildly in March, tracking both domestic and global events.


Yield on the 6.45% 2029 G-sec, the 10-year benchmark, opened the month at 6.35%, reached 6.22% mid-month andclosed at 6.12% – down 25 basis points (bps) compared with its February close of 6.37% and within CRISIL’s forecastrange of 5.90-6.20%.


The month started with an unexpected 50 bps rate cut by the US Federal Reserve (Fed) on March 3 – a move aimedat countering the economic impact of the rapid spread of Covid-19 – which led to a 12 bps fall in the yield to 6.23%.


Expectations of a similar rate cut by the Reserve Bank of India (RBI) and a sharp decline in crude oil prices pulled theyield down 10 bps on March 9 to 6.08% at close.


Over the next few sessions, domestic yields rose sharply following the trend in US Treasury yields and due tocontinued selling by foreign portfolio investors (FPIs), lifting the benchmark G-sec yield to 6.32%. Indeed, in the firsthalf of the month, overseas investors pulled out a net Rs 24,776 crore from equities and Rs 13,199 crore from debt inIndia.


Then, with the threat of a recession due to Covid-19 mounting, the Fed and global central banks cut their policy ratesin a concerted effort. On March 15, the Fed again cut its policy rate – by 100 bps this time. This raised expectationof a rate cut by the RBI on or before the Monetary Policy Committee’s (MPC) scheduled meeting and the benchmarkyield eased by 10 bps on March 16. The gain, however, reversed as the yield inched up to 6.40% on March 19 due tonegative sentiment that turned investors risk off.


After the announcement of the lockdown on March 24, the Union Ministry of Finance announced a relief package ofRs 1.7 lakh crore on March 26. There was, however, no mention of additional market borrowings to fund the package,which eased the yield by 10 bps. Subsequently, the MPC meeting was advanced and it cut policy rate by 75 bps andalso announced a host of other measures to boost liquidity. This tamped the yield down by a further 9 bps and thebenchmark security finally closed the month at 6.12%.


CRISIL’s forecast for the benchmark yield is 6.05-6.35% for April-end and 6.10-6.40% for June-end.


Corporate bond spreads over the 10-year benchmark G-sec yield were at 99 bps and that of state developmentloans (SDLs) at 94 bps – higher than CRISIL’s forecast, as the easing in G-sec was not reflected in SDL and corporatebonds due to limited buying interest.