Updates in Debt & Currency Market

Key headlines from the week:

India’s benchmark yields traded mixed during the week. Yields increased at the start of the week and closed at around 7.428% on July 11, 2022 ahead of release of headline inflation data for India. Benchmark yields started to decline as a result of decline in international crude oil prices. Benchmark yields ended the week at the level of around 7.438%.

Domestic Equity Markets traded lower for most of the days during the week. Domestic markets traded higher at the end of the week due to reduction in foreign capital outflow. Markets declined in the week due to the pessimistic sentiments in global stock markets. Indian domestic markets were largely impacted by the negative sentiments from the US stock markets and Asian stock markets.?

US stock markets, overall, declined during the week. Stock markets in US showed mixed trends when favourable employment data impacted market sentiments positively. Whereas, stock markets in US traded lower when headline inflation in US for June 2022 increased and remained at the elevated level of 9.10%.

Brent crude prices softened during the week. International crude oil prices declined as a result of fear of upcoming recession, renewed possibility of fresh Covid-19 restrictions in China and possibility of reduced global demand.?

US 10-year treasury yields traded at around 3.092% at the start of the week. Benchmark treasury yields in US declined initially as investors were cautious ahead of release of headline inflation data for June 2022 in US. Yields started to increase again as headline inflation data for June 2022 in US surged to 9.10% increasing the possibility of further rate hike by the US federal reserve.?

Indian rupee continued its declining trend against the US dollar during the week. Indian currency touched the level of around Rs. 80.00 as against US dollar on July 14, 2022 due to persistent capital outflows and increasing possibility of further policy interest rate hikes by the US federal reserve as a result of elevated inflation level experienced by the US economy in June 2022.??

Asian stock markets traded mixed during the week. Asian markets were impacted by the various factors such as decline in the US stock markets, increased possibility of hike in interest rates in US, possibility of economic downturn and possibility of reduction in global demand due to imposition of fresh Covid-19 curbs in China.?

Indian Debt Market Update:

India’s benchmark yield during the week showed a mixed trend. Benchmark yields were impacted by the fluctuations in the international crude oil prices and inflation situation in the country. Fall in crude oil prices globally led to fall in benchmark yields in India whereas rise in crude oil prices globally as well as elevated level of inflation led to rise in benchmark yields in India. Yields increased at the start of the week ahead of release of headline inflation data for June 2022, and thereafter started to decline due to fall in international crude oil prices. Yields again increased at the end of the week as a result of rise in international crude oil prices. Yields were closed at the start of the week at around 7.428% on July 11, 2022 whereas yields were closed at 7.438% at the end of the week on July 15, 2022.?

India’s benchmark bond yields were also influenced by the inflation level in India. National Statistical Office, Ministry of Statistics and Programme Implementation, Government of India (GoI) on July 12, 2022 released the headline inflation data for the month of June 2022. In the month of June 2022, CPIC which is a headline measure of inflation marginally reduced to the level of 7.01% from 7.04% recorded in the previous month. The benchmark yields declined to around 7.339% on July 13, 2022 as a result of reduction in headline inflation. However, headline inflation remained above the target level (4% (+/-2%)) of Flexible Inflation Targeting (FIT) mechanism for the sixth consecutive month. The headline inflation level of 7.01% recorded in June 2022 is caused by the components such as food and beverages (7.56% y-o-y), clothing and footwear (9.52% y-o-y), fuel and light (10.39% y-oy) and services (6.28% y-o-y).??

Apart from CPI-C data, Office of The Economic Advisor, Ministry of Commerce and Industry, Government of India (GoI) on July 14, 2022 released the data for Wholesale Price Index (WPI) for India. WPI also softened to 15.18% in June 2022. Among the major components of WPI, primary articles recorded a growth of (19.22% y-o-y), fuel and power recorded a growth of (40.38% y-o-y) and manufactured products recorded a growth of (9.19% y-o-y). WPI inflation in India has been in double digits for 15 months in a row.?

Possibility of recession in the US economy impacted the bond market in Asia as well as in India. The risk of economic slowdown, weakening of Indian currency and elevated inflation level have caused Indian bond yields to surge to the highest level in June in last two years. Announcement by Government of India to sell bonds worth of Rs. 14.30 trillion in this fiscal year exacerbated the situation in the Indian bond market and led to upward pressure on bond yields. As per the report from citi, RBI will also not be able to purchase bonds in order to provide some respite because of excess liquidity in the system.??

On the corporate front, Indiabulls Housing Finance raised Rs. 500 crores by selling local bonds which were rate AA (stable) by rating company ICRA. Tenure of the bonds was 10 year and proceeds will be used for building up the loan book.

Continuum Green Energy raised 350 US$ million through offshore bonds. Company sold floating rate bonds to international investors. These bonds will mature in three and half years. Price of the bonds was arrived at after adding a fixed mark-up over the Secured Overnight Financing Rae (SOFR). The proceeds of the bond issue will be used for refinancing and expansion.??

Currency Market Update:

The Indian currency continued its depreciating trend during the week against the US dollar. Indian currency appreciated at the end of the week when Reserve Bank of India (RBI) intervened in the foreign exchange market to curb the excessive volatility in Indian currency and lift the Indian currency against the US dollar. This ensured that the Indian currency doesn’t depreciate beyond the level of Rs. 80.00 against the US dollar. Overall, Indian rupee depreciated against the US dollar at the end of the week and closed at the level of around Rs. 79.842 per US dollar.?

Indian currency depreciated against the US dollar at the start of the week and closed at around Rs. 79.476 per US dollar on July 11, 2022 due to weak trends in domestic equity markets and worries over global economic slowdown. On weekly basis, Indian rupee ended at around Rs. 79.476 as against US dollar on July 11, 2022 and closed at around Rs. 79.842 as against US dollar on July 15, 2022 showing an overall depreciation of around 0.46% during the week.?

As per the Weekly Statistical Supplement (WSS) data released on July 15, 2022 by RBI, foreign exchange reserves with the RBI declined by around 8 US$ billion and recorded at the level of 580.252 US$ billion in the week ended July 08, 2022. This was the lowest level of foreign exchange reserves recorded by India in last 15 months.??

Foreign currency assets (FCAs) declined to the level of 518.089 US$ billion during the week ended on July 08, 2022. On weekly basis, FCA declined by 6.656 US$ billion, gold reserves declined by 1.236 US $ billion and recorded at 39.186 US$ billion whereas special drawing rights with the International Monetary Fund (IMF) registered a decline and recorded at the level of 18.012 US$ billion.?

??The decline in the foreign exchange reserves with the RBI can be attributed to RBI’s intervention in the foreign currency market to ensure that the Indian currency doesn’t depreciate excessively against the US dollar. Indian currency tanked and registered a record low at the level of around Rs. 80.006 against the US dollar on July 14, 2022. Rupee plunged against the US dollar as a result of possibility of more aggressive adoption of monetary policy by US federal reserve in order to control the rising price level in US, foreign capital outflows and worries over global economic slowdown.?

RBI Bond Auctions

The benchmark yield for 10-year government securities increased from around 7.428% on July 11, 2022 to around 7.438% on July 15, 2022. The notified amount for government auction as per the press release of Reserve Bank of India (RBI) released on July 15, 2022 was Rs. 32,000 crores. Auctions for all the notified amount of securities 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 7.1651% and 6.8891% respectively. RBI notified the long-term maturity securities such as 7.54% GS 2036 and 6.99% GS 2051 for the amount of Rs. 10,000 crores and Rs. 9,000 crores respectively. These securities were offering a yield to maturity at 7.6209% and 7.7595% respectively. The log-term term maturity securities were offering higher yields which is indicative of higher interest rates in the future period.?