Interest rates


RateView : CRISIL's outlook on near-term rates

February 2020


Jittery January

Government security (G-sec) yields were volatile in January amid geopolitical tensions in the Middle East, a shootupin retail inflation to a 64-month high, continuation of the Reserve Bank of India’s (RBI) Operation Twist, and Budget expectations.


Yield on the 10-year benchmark G-sec opened the month at 6.50%, rose to a high of 6.67% near mid-month, and reversed course to close at 6.60% — only 4 basis points (bps) higher than the December close of 6.56% — within the 6.55-6.75% band forecast by CRISIL.


The benchmark yield eased 6 bps on January 1, however, as crude oil prices rose above $70 per barrel amid tensions between the US and Iran, the yield hardened by 5 bps. Then, with no announcement forthcoming from the Reserve Bank of India (RBI) on a fourth round of special open market operation (OMO) the market had expected on January 10, the yield rose 6 bps more to 6.59%. And on January 14, as inflation based on the consumer price index (CPI) printed at 7.35% for December, it rose a further 7 bps to 6.67%.


The fourth round of Operation Twist was announced on January 16, but the market reaction was muted as the RBI announced switches/conversion of securities on the same day.


The result of OMO purchases and simultaneous sale of shorter-tenure securities – with the objective of lowering term premiums – pulled the 10-year benchmark G-sec yield down by 4 bps. Over the next few sessions, G-sec yields eased further, tracking the US Treasury yields.


End of the month, the benchmark yield rose again amid fiscal concerns ahead of Union Budget 2020-21, and closed 4 bps up at 6.60%.


Spreads over the 10-year benchmark G-sec yield were 96 bps for corporate bonds and 59 bps for state-development loans (SDLs), in line with CRISIL’s forecast.


CRISIL’s view for the 6.45% G-sec 2029 yield is 6.40%-6.60% for February-end and 6.53%-6.73% for April-end. Spreads for corporate bonds and SDLs are expected to remain steady with some possibility of compression over the next three months.