Updates in Debt & Currency Market

Key headlines from the week:

India’s benchmark yield traded mixed during the past week. It closed at around 7.409% on June 27, 2022, as a result of decline in international crude oil prices. Yields impacted positively by the rise in US benchmark yields. Yields declined at the end of the week from theirs highest level of around 7.466% on June 28, 2022. It ended at the level of around 7.424% at the end of the week.?

Domestic Equity Markets showed a decelerating trend in the week. Markets declined due to the negative impact of rising inflation and prospects of upcoming recession on market sentiments.?

US stock markets also showed a decelerating trend as recession fears gripped the market sentiments. Investors analysed the federal reserve’s FOMC decisions of adopting tight monetary policy in order to curb rising inflationary pressures. Hawkish stance of the federal reserve impacted market sentiments negatively as investors viewed this hawkish stance of fed reserve as inflationary pressures will persist in the upcoming period.?

Brent crude prices traded mixed during the week. Brent crude oil prices increased in the initial days of the week as G-7 nations announced to impose new sanctions on Russia. Brent crude oil prices declined as fear of economic recession increased the possibility of reduction in global demand.?

US 10-year treasury yields traded around 3.156% initially in the week as investors assessed that inflation risk would increase as major central banks in the world resorted to the increase in policy interest rates. Benchmark yields declined as fears of recession gripped the market sentiments.?

Indian rupee showed depreciating trend against the US dollar during the week. Indian currency inched towards Rs. 80.00 against the US dollar and witnessed worst quarterly drop since the Covid-19 pandemic Rupee closed at around Rs. 79.035 against the US dollar on June 29, 2022.??

Asian stock markets were impacted by the positive and negative news from the global stock markets especially cues from US stock markets. Besides, markets were impacted by the prospects of rise in inflation, possibility of economic downturn and changes in the international crude oil prices.?

Indian Debt Market Update:

India’s benchmark yield declined initially in the week as a result of fall in international crude oil prices. Yields rose in the middle of the week tracking a rise in US benchmark yields and again declined thereafter at the end of the week. Overall, benchmark 10-year bond yield in India showed a declining trend during the week. Yields were closed at the start of the week at around 7.409% on June 27, 2022 whereas yields were closed at 7.424% at the end of the week on July 01, 2022.?

As per the Financial Stability Report June 2022, released by Reserve Bank of India (RBI) on June 30, 2022, in the period of around 6 months i.e., between end December 2021 to June 16, 2022, benchmark yields increased by 116 basis points. It touched to around 7.62% as an effect of global as well as domestic developments. Rising crude oil prices, tight monetary policy stance adopted by the major central banks around the globe and increase in US treasury yields have led to increase in benchmark treasury yields in India.?

Benchmark yields softened during the mid-March as result of falling crude oil prices but it again increased as the Union Government announced the borrowing programme of the government. Trading activity in the government securities market started to increase by mid-March and reduced thereafter in May-June 2022.?

Spreads in corporate bond markets narrowed during the year 2021-22 in response to the RBI’s liquidity and monetary operations. Corporate bond market experienced easy financial conditions. After January 2022, corporate bond yields increased, moving in tandem with G-Sec yields. Yield on 3- year AAA rated corporate bond recorded a level of around 7.40%, which is 141 basis points higher from end-March 2022 as on June 16, 2022.

Future Enterprises Ltd. (FEL) announced another default of Rs. 6.15 crores interest payment. The company defaulted on interest payment on nonconvertible debentures. The interest payment was due on June 29, 2022. This is the fifth default in June by the Future Group firm. In the previous week, company had announced its inability to pay interest payments worth Rs. 4.10 crores, Rs. 85.71 lakh and Rs. 6.07 crores on non-convertible debentures. FEL had defaulted another interest payments worth of Rs. 1.41 crores in the previous month. Indiabulls Housing Finance (IBHF), raised 100 US$ million from State Bank of India (SBI). Funds raised through the external commercial borrowings route.??

Currency Market Update:

The Indian currency showed a declining trend for most of the week against the US dollar. Indian currency appreciated marginally at the end of the week. Rupee depreciated as a result of volatility in the market created by the geo-political tensions in the Eastern Europe, possibility of further policy interest rate increase by the US federal reserve, and persistent foreign capital outflow and weak prospects of global recovery.?

Rupee appreciated against the US dollar at the start of the week and closed at around 78.414 per US dollar on June 27, 2022 due to declining global crude oil prices. On weekly basis, Indian rupee ended at around Rs. 78.414 as against US dollar on June 27, 2022 and closed at around Rs. 78.901 as against US dollar on July 01, 2022 showing an overall depreciation of around 0.62% during the week which is higher than the previous week.

As per the Weekly Statistical Supplement (WSS) data released on July 01, 2022 by RBI, foreign exchange reserves with the RBI increased by around 2.734 US$ billion and recorded at the level of 593.323 US$ billion in the week ended June 24, 2022.

Foreign currency assets (FCAs) increased to the level of 529.216 US$ billion during the week ended on June 24, 2022. On weekly basis, FCA increased by 2.334 US$ billion, gold reserves increased by 342 US $ million and recorded at 40.926 US$ billion whereas special drawing rights with the International Monetary Fund (IMF) registered an increase and recorded at the level of 18.210 US$ billion.

During the first six months of this calendar year, foreign institutional investors sold worth of Rs. 2,23,944 crores. Capital outflow in the month of June 2022, recorded at the level of Rs. 50,000 crores. Foreign Institutional Investors (FIIs) pulled the fund out of the Indian market for nine months in a row. As per the ICICI securities data, most of the foreign portfolio investment (FPI) selling has been concentrated in the IT and financial services sector.

Continuous selling by foreign institutional investors in Indian markets and additional economic sanctions on Russia have put downward pressure on the Rupee. Besides, dangers of experiencing twin deficit problems, possibility of adopting more aggressive monetary policy by the US federal reserve to control inflationary pressures may cause Indian currency to depreciate further to the level of around Rs. 80.00/Rs. 81.00 against the US dollar.??

RBI Bond Auctions:

The benchmark yield for 10-year government securities increased from around 7.409% on June 27, 2022 to around 7.424% on July 01, 2022. The notified amount for government auction as per the press release of Reserve Bank of India (RBI) released on July 01, 2022 was Rs. 32,000 crores. Auctions for all the notified amount of bonds with different yields and maturities such as 7.38% GS 2027 (Rs. 9,000 crores), GOI FRB 2028 (Rs. 4,000 crores), 7.54% GS 2036 (Rs. 10,000 crores) and 6.99% GS 2051 (Rs. 9,000 crores) have been accepted by RBI.?

In Friday’s auction, for the medium-term maturity securities such as 7.38% GS 2027 for the amount of Rs. 9,000 crores and GOI FRB 2028 for the amount of Rs. 4,000 crores were offering a yield to maturity at 7.1819% and 6.8948% respectively. Longer-term maturity securities such as 7.54% GS 2036 for amount Rs. 10,000 crores and 6.99% GS 2051 for the amount of Rs. 9,000 crores were offering yield to maturity at 7.5915% and 7.7092% respectively.

As per the RBI, for the July-September 2022, market borrowing by the state governments has been pegged at Rs. 2.12 trillion.?