India - Debt Market Update

18 JUNE 2019

Liquidity conditions in the Indian debt markets remain tight, while the RBI continues to provide support through various tools for liquidity injection, such as – Open Market Operations (INR 2.4 trn since Sept18), FX Swaps (INR 700 bn in Mar/Apr19), easing SLR norms and other measures to encourage lending to NBFCs. However, elevated levels of currency in circulation and recent corporate rating downgrades remain major causes of concern.

While 10yr G-sec bond yields have corrected by over 100 bps from highs seen just after the IL&FS default (8.1%, 25th Sep18), spreads for corporates continue to remain elevated. Consequently, NBFCs continue to suffer from high borrowing costs and constricted margins – as Banks and Mutual Funds remain cautious while lending to NBFCs. Sectoral analysis suggests higher stress in real estate, mining, food processing and construction, while metals, engineering, textiles, and infra show some recovery.

In response to elevated risks in the Indian bond markets, we had changed the status of Reliance Hybrid Bond Fund and Reliance Equity Hybrid Fund to “Not Approved/Under Review” for distribution in May19, and have further restricted the other remaining 4 Credit Risk Mutual Funds on our platform (Reliance Credit Risk Fund, L&T Credit Risk Fund, HDFC Credit Risk Debt Fund and UTI Credit Risk Fund) in June19. This is in addition to the 9 debt funds we had restricted as per our earlier note.

The RBI decided to further reduce the repo rate to 5.75% during their June 2019 MPC review, however any further rate cuts would be contingent on the progress of monsoon and budget math. Fixed Income investors, subject to their respective risk appetites, may continue to focus on high credit quality with a preference for short duration and remain diversified in their portfolios.

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