Interest rates


RateView : CRISIL's outlook on near-term rates

March 2020


Virus scare

Government security (G-sec) yields trended lower in February, given budget and monetary policy announcements, increased foreign portfolio investment (FPI) inflows in the debt market and the novel coronavirus outbreak. Yield on the 10-year benchmark G-sec opened the month at 6.50%, reached 6.37% near mid-month, and traded in the 6.36-6.41% band thereafter. The 10-year benchmark yield closed at 6.37% in February - 23 basis points (bps) lower than the January close of 6.60% – marginally outside the 6.40-6.60% band forecast by CRISIL.


The budget did not announce any plan for additional borrowing through G-secs, which led to an easing of 10 bps in the 10-year benchmark yield on February 3. Further, potential listing of Indian sovereign bonds in global indices boosted market sentiment. In its latest bi-monthly review, the Monetary Policy Committee (MPC) kept the policy repo rate unchanged at 5.15% while retaining the accommodative stance. RBI's announcement of long-term repo operations (LTROs) for one year and three years led to an easing in yields by 6 bps – closing at 6.45% on February 7. The LTRO dates – February 17 for 3-year and February 24 for 1-year – saw a further easing of yields in shorter tenure securities.


Mid-February, major inflow through FPIs in the debt market led to an easing of 11 bps over two sessions, with the 10-year benchmark G-sec closing at 6.37% on February 14. The market remained immune to inflation based on the Consumer Price Index (CPI) printing at 7.59% for January compared with 7.35% for December. The benchmark paper traded in a band of 6.36-6.41% in the second half of the month.


A plunge in the United States (US) Treasury yield and crude oil prices, along with FPI sell-off in the last week of February, kept the 10-year benchmark yield rangebound at 6.36-6.38%.


Spreads over the 10-year benchmark G-sec yield were at 82 bps for corporate bonds and 58 bps for state development loans (SDLs). Spreads for SDLs were in line with CRISIL’s forecast. However, spreads for corporate bonds compressed by 14 bps.


CRISIL’s forecast for the 6.45% G-sec 2029 yield is 5.90-6.20% for March-end and 6.10-6.40% for May-end. Falling crude oil prices and global growth concerns over coronavirus may lead to volatility in yields.


Spreads for AAA rated PSU corporate bonds and SDLs are expected to remain steady. However, spreads for other corporate bonds need monitoring due to the evolving Yes Bank situation.