April 2014 | srei
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April 2014

April, 2014

Indian Economy Review

IMF expects India’s economy to recover

The International Monetary Fund (IMF) said that India’s growth could recover to 5.4% in the current fiscal year and to 6.4% in the next year to March 2016 due to stronger global growth, an improvement in export competitiveness and implementation of the recently-approved investment projects. The Asian Development Bank (ADB) however cut India’s economic growth estimate for 2014-15 from 5.7% earlier to 5.5%, saying that industrial growth is too sluggish. At home, the National Council of Applied Economic Research (NCAER) projected a 5.1-5.5% economic growth in 2014-15 for India

Inflation rises slightly after easing for three months

After easing for three consecutive months, domestic inflation increased slightly in March, led up by an increase in food prices. Retail inflation measured by the consumer price index (CPI) rose to 8.31% in March from 8.03% in February, while wholesale price index (WPI) inflation rose to a three-month high of 5.70%.

CPSE ETF success may be duplicated in the future, new banking licenses issued

After successfully divesting its stake through the central public sector enterprise exchange traded fund (CPSE ETF) in the previous fiscal (March), the government has now made plans to divest more of its stake in PSEs that are part of the CPSE ETF; the government may even add other companies in new ETFs that may be launched in the coming quarters. During the interim budget, the government said it aims to garner Rs 36,925 via divestment in the current fiscal.

Meanwhile, the Election Commission allowed the RBI to take appropriate decisions to issue new banking licenses. The central bank went ahead and gave in-principle banking license to IDFC and Bandhan Financial.

Domestic GDP Growth

Other major developments

  • The Finance Ministry rejected the Parliamentary Standing Committee’s recommendation to raise the income-tax exemption limit to Rs 3 lakh and to adjust other slabs saying that it will lead to an annual loss of Rs 60,000 cr to the exchequer.
  • Income Tax Department released a revised draft of Direct Taxes Code (DTC) Bill; among other things, it proposes a tax slab of 35% for individuals and Hindu Undivided Family with total annual income of over Rs 10 cr.
  • The Finance Ministry has allowed infrastructure companies to amortize their cost of construction and treat it as a business expenditure while calculating their taxable income.
  • The government has disallowed oil companies to increase petrol and diesel prices as per their stated policy.
  • The government increased gold’s base import price by $10 per 10 gm to $431 and that of silver by $2 a kg to $646.
  • The Power Ministry has mandated that the Power Finance Corporation will be a consultant for all states for long and medium term power procurement.
  • The Swiss government has agreed to share information with the Indian government on tax evaders without approval of the account holder.

Telecom-related developments

  • The Telecom Commission said that all recommendations made by the Telecom Regulatory Authority of India will mandatorily have to be referred to the Commission.
  • The Telecom Disputes Settlement and Appellate Tribunal lifted the ban imposed on intra-circle roaming pacts among operators for offering 3G services.
  • Further, it quashed Rs 1,200 cr in penalties imposed on Bharti Airtel, Vodafone India and Idea Cellular by the telecom department for entering into 3G network sharing agreements.
  • The Department of Telecommunications has allowed Aircel to raise Rs 21,000 cr through local and overseas loans through a consortium led by the State Bank of India.

Key regulatory developments

  • The RBI issued guidelines on uniform accounting standard for Asset Reconstruction Companies as per recommendations made by the Key Advisory Group.
  • It also said that the non-compete clauses will not be allowed for foreign direct investment (FDI) in the pharmaceutical sector, except in special circumstances.
  • Further, it permitted foreign individuals and companies to invest in local partnership firms.
  • The RBI said that non-operative financial holding companies will be recognised as a category of non-banking financial companies.
  • SEBI invited students to develop mobile applications for entertainment-based financial education with the winner set to receive Rs 3 lakh prize money.
  • The Competition Commission of India (CCI) tightened scrutiny rules for mergers and acquisitions; said that it will look at the substance of the transaction and not just the structure while approving any merger.
  • The Competition Commission of India (CCI) tightened scrutiny rules for mergers and acquisitions; said that it will look at the substance of the transaction and not just the structure while approving any merger.
  • Further, it directed the Union Health Ministry to make drug companies that experiment with new formulations answer queries pertaining to human risk, need for the drug, and alternative safe methods.
  • The National Pharmaceutical Pricing Authority raised the ceiling price by 6.32% for 348 essential drugs for 2014-15.
  • It also set new ceiling prices for 11 formulations in the latest round of the new drug pricing policy.
Indicators Current Previous
Monthly WPI Inflation 5.70% (March 2014) 4.68% (February 2014)
Industrial Growth -1.9% (February 2014) 0.8% (January 2014)
Exports $312.3bn (Apr-2013- March 2014) $300.6 bn (April 2014 - March 2014)
Imports $450.9bn (April 2013-March 2014) $491.48bn (April 2012-March 2013)
Trade Deficit -$138.6bn (April 2013-March 2014) -$190.91bn (April 2012-March 2013)
Gross Tax Collections Rs8,92,007cr (April 2013-February 2014) Rs8,12,616cr (April 2012-February 2013)

IIP Growth

IIP Growth

  • India’s Index of Industrial Production contracted 1.9% in February, the lowest in nine months, mainly due to contraction of the capital goods sector; it had logged an upwardly revised 0.8% in January and 0.6% a year ago.

IIP-Core Sector Growth

IIP Core Sector Growth

  • Core sector growth slowed to 2.5% in March from 7% in the same month a year ago, and 4.5% last month, as output of crude oil, natural gas and fertiliser declined.

Fiscal Deficit

Fiscal Deficit

Major Indicators released in April

  • India’s trade deficit stood at $10.51 bn in March, the highest since October 2013, and up from $8.13 bn in February.
  • Tax collections by the government during the April-February period rose 9.8% on year to Rs 8.92 lakh cr; February’s tax collections stood at Rs 70,700 cr versus Rs 66,100 cr a year ago.
  • Data from the RBI showed that total foreign direct investment inflows into India in February rose 1% on year to $3.022 bn from $2.991 bn a year ago.
  • Meanwhile, among private economic indicators, India’s HSBC manufacturing purchasing managers' index (PMI) dropped from its one year high of 52.5 in February to 51.3 in March, while services PMI fell to a three-month low of 47.5 in March from an eight-month high of 48.8 in February.
  • India’s Conference Board Leading Economic Index for March rose 0.2% in March, following a 0.4% fall in February, while the Coincident Economic Index climbed 1.5% in March, after a 1.6% fall in February.

Global Economy Review

IMF sees improvement in global economy

The International Monetary Fund (IMF) said that global economy is strengthening but growth will be uneven and subpar. It expects global growth to average 3.6% in 2014, up from 3% in 2013, and to rise to 3.9% in 2015. However, the latest growth projection for 2014 was marginally below January’s forecast of 3.7% due to a slowdown in emerging markets.

World GDP Growth

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Major Global Central Bank
US GDP 0.1% Q1 2014 2.6% Q4 2013 US Fed Funds Rate 0-0.25%
US unemployment 6.3% April 2014 6.7% March 2014 Bank of England 0.50%
UK GDP 3.1% Q1 2014 2.7% Q4 2013 European Central Bank 0.25%
Euro Zone GDP 0.5% Q4 2013 -0.3% Q3 2013 Japan Benchmark Rate 0-0.10%
Japan GDP 0.7% Q4 2013 1.1% Q3 2013    
China GDP 7.4% Q1 2014 7.7% Q4 2013    
Singapore’s GDP 5.1% Q1 2014 5.5% Q4 2013    

US Fed trims bond buying program by further $10 bn

Despite paltry GDP growth data for Q1 2014 at 0.1% compared with 2.6% in Q4 2013, the US Federal Reserve (Fed) expects the economy to improve and therefore decided to taper the monthly bond purchases to $45 bn from $55 bn. The Fed said that information received since the Federal Open Market Committee met in March indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions. Meanwhile, the US Fed kept its interest rate unchanged at 0-0.25% with Fed Chief Janet Yellen reiterating that the central bank will keep the interest rate in the 0-0.25% range until economic recovery is on a more secure footing. In a separate development, the IMF said that a major stimulus to global growth has come from the US and kept its 2014 growth forecast for the US unchanged at January’s projection of 2.8%.

Key US economic indicators

  • The budget deficit came in at $37bn in March, a decrease of $70bn, or 65%, from the shortfall posted in the same month last year.
  • The trade deficit increased to $42.3 bn in February, 7.7% above January’s deficit of $39.3 bn; exports slipped 1.1% to $190.4 bn and imports edged up 0.4% to $232.7 bn.
  • The US economy added 288,000 jobs in April, following an upwardly revised 203,000 jobs in March; the unemployment rate fell to 6.3% in April, from 6.7% in the previous month.
  • Retail sales increased 1.1% in March, logging their biggest gain since September 2012 and compared with 0.7% increase in February.
  • Industrial production rose 0.7% in March compared to an upwardly revised 1.2% rise in February.
  • Personal spending rose 0.9% in March, compared with a 0.5% gain in February, while personal income rose 0.5%, after gaining 0.4% in February.
  • The consumer price index (CPI) inflation rose 0.2% in March compared to a 0.1% rise in February.
  • Among important housing indicators –pending home sales jumped 3.4% in March versus an upwardly revised 0.5% drop in February while US new home sales dropped 14.5% in March to a seasonally adjusted annual rate of 384,000 from February's upwardly revised 449,000.


Eurozone’s economic outlook improves but low inflation remains a threat

The IMF raised the 2014 growth forecast for euro zone to 1.2% from 1.1% amid stronger consumer and business spending in Germany and reduced government spending cuts across the Euro zone. However, the IMF cautioned that growth is projected to remain weak and fragile in countries with high government debt such as Italy and Spain. It also added that excessive low inflation throughout the Euro zone is a threat to progress and could lead to deflation. European Central Bank Chief Mario Draghi said that the central bank is mulling several measures, including negative interest rates and quantitative easing (QE), to help the euro zone avert deflationary concerns and put the economy on the recovery path. Meanwhile, in its latest monetary policy meeting, the ECB decided to hold the Euro zone’s key interest rate unchanged at 0.25%.

Key Eurozone economic indicators:

  • Euro zone trade surplus for February grew to 15 bn euro in February from 13.9 bn euro in January.
  • The unemployment rate remained elevated at 11.8% in March, unchanged from February.
  • The industrial output rose 0.2% in February as compared with flat growth in January.
  • The annual rate of inflation rose to 0.7% in April from 0.5% in March.

UK economy on a strong footing

Economic activities gathered pace in the UK after the country posted upbeat Q1 2014 GDP growth and the IMF gave an optimistic outlook. The country’s GDP grew at the fastest pace in over six years by 3.1% on an annualized basis in Q1 2014 following a revised 2.7% gain in the previous quarter. The IMF sharply raised its growth forecast for 2014 to 2.9% from January’s projection of 2.4% and said that the UK economy will be the fastest growing among the G7 nations in 2014. Meanwhile, the Bank of England unanimously decided to maintain the key bank rate at a historic low of 0.50% and monetary stimulus at £375 bn.

Key UK economic indicators:

  • UK net consumer credit increased by 2.9 bn pounds in March, up from 2.1 bn pounds in February.
  • The visible trade deficit narrowed in February to 9.1 bn pounds from 9.5 bn pounds in January.
  • The unemployment rate fell to a five year low of 6.9% in the three months to February from a downwardly revised 7.1% in the quarter through January.
  • The number of people in the UK claiming unemployment benefits fell by 30,400 to 1.142 mn in March, the lowest level since November 2008, following an upwardly revised 37,000 claims in February.
  • Industrial production rises 0.9% in February after a 0.1% rise in January.
  • The inflation rate as measured by the Consumer Prices Index (CPI) fell to 1.6% in March from 1.7% in February.


Gloomy outlook for Asian economies

Outlook for Asian economies remained downbeat as the IMF cited two major risks – a) sharper-than-expected slowdown in China and b) slowdown in Japan’s economic activities due to a tightening fiscal policy stance in 2014-15. Meanwhile, the World Bank expects the developing East Asia and Pacific region to grow 7.1% in 2014 and 2015, down from 7.2% rate it had previously forecast for both years.

IMF asks Japan for more reforms to sustain economic revival

The Japanese government remains confident that the economy is on a modest growth path despite being affected by the 3% consumption tax hike in April. Bank of Japan Governor Haruhiko Kuroda reiterated that the ultra-easy monetary policy introduced in April 2013 is delivering the desired effects steadily and the Japanese economy is smoothly following a path to achieve the 2% price stability target. But the IMF in its report stated that without additional reforms, Japan risks falling back into lower growth and deflation, a further deterioration in the fiscal situation, and an overreliance on monetary stimulus with negative consequences for the region.

Key Japanese economic indicators:

  • Japan logged a record trade deficit of 13.75 trillion yen in fiscal 2013, up 68.5% from a year earlier.
  • Industrial production was up a seasonally adjusted 0.3% month-on-month in March a 2.3% after a 2.3% fall in February
  • The annual core CPI rose to a 22-year high of 2.7% in April from 1.3% in March.
  • The unemployment rate was 3.6% in March, same as in the previous month.

China faces risk of economic slowdown and rapid expansion of debt

The IMF expected China's growth to slow to 7.5% in 2014 from 7.7% in 2013; it warned that China faces the twin risks of an unexpectedly sharp slowdown and rising vulnerabilities in its financial system due to surging government and private debts. Meanwhile, China’s economy grew 7.4% in Q1 2014 (the slowest level in 18 months) from a year earlier, slowing from 7.7% in the final quarter of 2013, led by a slowdown in investment and consumption.

Key Chinese economic indicators:

  • China’s imports fell 11.3% year-on-year to $162.4 bn in March after rising 10.1% in February, while exports fell 6.6% to $170.1 bn in March after plunging 18.1% in February, thereby leaving the country with a trade surplus of $7.7 bn for March, compared with a trade deficit of $23 bn in February.
  • The manufacturing PMI edged up to 50.4 in April compared with 50.3 in March.
  • The CPI inflation jumped to 2.4% year-on-year in March from 2% in February.
  • Retail sales rose 1.23% in March following a rise of 0.71% in February.
  • Industrial production expanded by 8.8% in March from an average growth of 8.6% in the January-February period.

Singapore's economy grew by 5.1% in Q1 2014

Singapore's economy grew by 5.1% in Q1 2014 as an improvement in the manufacturing sector offset a slowdown in the services sector; in Q4 2013, the island state had grown at a pace of 5.5%. Monetary Authority of Singapore expects the country’s economy to expand by 2–4% in 2014; it also lowered its headline inflation outlook to 1.5-2.5% for 2014 due to decreased cost pressures from accommodation and private road transport.

Domestic Fixed Income Review

Domestic GSec Yield

6 Month LIBOR

Interbank call money rates ended at 8.70-9.00% on April 30, 2014 compared with 10-10.50% on March 28, 2014. Call rates were on the lower side earlier in the month due to improvement in the liquidity condition on government spending. Liquidity also improved following redemption of 7.37%, 2014 gilt worth over Rs 40,000 cr on April 16, some state development loans and Treasury bills (T-bills). To improve liquidity, the Reserve Bank of India (RBI) had also conducted three-day and 13-day term repo auctions for notified amounts of Rs 20,000 cr and Rs 60,000 cr, respectively, on April 4. Call rates, however, started rising later in the month as demand for funds from banks increased to meet their reserve needs and as liquidity tightened due to an increase in the currency circulation amid the ongoing general elections.

Indian government bond (gilt) prices ended lower in April, with the yield on the 10-year benchmark 8.83% 2023 paper rising to 8.83% on April 30, 2014 compared with 8.80% on March 28, 2014. Gilt market onset the month with downbeat sentiment on prospects of rising borrowing costs after the RBI cut the amount of funds banks can borrow via the LAF repo window. In its monetary policy review in March, the central bank reduced the amount of funds that a bank can borrow via the LAF repo window to 0.25% of the bank's net demand and time liabilities even as it kept its key policy rate unchanged at 8.0%. Gilt prices also came under pressure due to a rise in the WPI inflation data which stoked the fear that the central bank might not be done with monetary tightening just yet. Gilt prices were also dented by inflation fears after the IMD forecasted below average rainfall and a weak rupee during the month.

Further decline in gilt prices was, however, restricted as strong demand was seen for central government g-sec and state government loan auctions during the month. Bond prices also rose due to intermittent value buying and the release of slightly lower-than-expected US jobs data. Persistent buying by mutual funds helped gilts rise further.

Among regulatory developments in the month,

RBI and SEBI barred foreign portfolio investors from investing in Treasury bills in order to encourage investment into long-term government securities. RBI set limits for Ways and Means Advances (WMA) for the first half of the financial year 2014-15 (April 2014-Sep 2014) at Rs. 35,000 cr; also fixed the quantum of intervention through Market Stabilisation Scheme (MSS) for the current fiscal at Rs 50,000 cr to manage liquidity. The central bank also put some curbs on overseas bond sale planned by troubled firms with the backing of bank guarantees, by laying out strict conditions for loans to overseas ventures which are used to pay back domestic loans. RBI is also considering the introduction of interest rate futures for government bonds of tenure other than 10 years.

SEBI prepared groundwork for launch of trading in four new categories of bonds-municipal bonds, Sukuk bonds, covered bonds, and bonds issued by co-operative societies. SEBI data showed that fund raising by listed companies through private placement of debt securities or bonds plunged by 23.6% to Rs 2.76 lakh crore in 2013-14, compared to the previous financial year.

On the banking front,

RBI directed banks to do away with the practice of levying penalty on account holders who don’t maintain a minimum balance in their savings account. It also asked banks to make credit card charges reasonable and directed them not to levy interest on card dues till the next bill date even if payment is not made before the due date. The central bank asked banks with offices abroad to formulate a policy for overseas real-estate transactions. Further, it released a draft report showing recommendations made by a working group to improve transparency and fairness in the credit pricing framework. It also said that banks shall not issue stand-by letters of credit or guarantee on behalf of overseas joint ventures or wholly-owned subsidiaries of Indian companies for the purpose of non-fund based credit facilities.


Fixed Income Indicators

Rates & Liquidity

  30-Apr-14 1 Week Ago 1 Month Ago
Repo 8.00 8.00 8.00
Reverse Repo 7.00 7.00 7.00
CRR 4.00 4.00 4.00
LAF o/s Repo (Rscr) 21690 21296 36104
LAF o/s Rev Repo (Rscr) 1475 3861 11880

Overnight                                                   Rate(%)

  30-Apr-14 1 Week Ago 1 Month Ago
Mibor 8.70 8.84 8.53
Call 9.00 7.50 10.50
CBLO 8.73 8.42 11.28
OIS 1Y 8.60 8.61 8.58
OIS 5Y 8.37 8.42 8.50

CDs                                                                       Yield(%)

  30-Apr-14 1 Week Ago 1 Month Ago
1-Month 8.79 8.79 8.58
3-Month 9.07 9.05 8.62
6-Month 9.20 9.13 9.03
1-Year 9.20 9.19 9.06

CPs                                                   Yield(%)

  30-Ap-14 1 Week Ago 1 Month Ago
1-Month 9.02 8.94 8.89
3-Month 9.35 9.44 8.86
6-Month 9.55 9.53 9.32
1-Year 9.58 9.56 9.44

Short Term Bonds                                                       Yield(%)

  30-Ap-14 1 Week Ago 1 Month Ago
1 Y G-Sec 8.59 8.57 8.50
1 Y AAA 9.38 9.40 9.27
1 Y AA 9.89 9.91 9.78
2 Y G-Sec 8.62 8.58 8.44
2 Y AAA 9.36 9.43 9.40
2 Y AA 9.85 9.92 9.89

Long Term Bonds                                                   Yield(%)

  30-Ap-14 1 Week Ago 1 Month Ago
5 Y G-Sec 8.80 8.81 8.86
5 Y AAA 9.49 9.52 9.55
5 Y AA 10.14 10.17 10.20
10 Y G-Sec 8.83 8.85 8.80
10 Y AAA 9.51 9.58 9.59
10 Y AA 10.32 10.39 10.40

Top 5 Graded G-Secs                                         Yield(%)

  30-Ap-14 1 Week Ago 1 Month Ago
8.83% CGL 2023 8.83 8.83 8.80
08.12 GS 2020 9.12 9.11 9.15
07.28% CGL 2019 9.12 9.12 9.15
08.28% CGL 2027 8.92 8.93 9.20
08.28% CGL 2027 8.93 8.92 9.04


  30-Apr-14 1 Week Ago 1 Month Ago
USD/INR 60.34



EURO/INR 83.31 84.49 82.58
GBP/INR 101.45 102.77


100 JPY/INR 58.93 59.51 58.83
USD/EURO 0.72 0.72 0.73


10 Year GSec Movement


Corporate Bond Yield


Corp. AAA, AA Bond Spreads

Economic Events Calendar

May 12, 2014
  • US Treasury Budget, April
  • India’s Index of Industrial Production, March
  • India’s CPI for Combined, Rural, and Urban, April
May 28, 2014
  • Euro zone Economic Sentiment, May
May 13, 2014
  • US Retail Sales, April
  • US Import and Export Prices, April
  • US Business Inventories, March
  • China’s Industrial Production, April
  • China’s Retail Sales, April
  • Japan’s Producer Price Index, April
May 29, 2014
  • US GDP, Q1 2014 (second estimate)
  • US Pending Home Sales Index, April
  • Japan’s PMI Manufacturing Index, May
  • Japan’s Consumer Price Index, April
  • Japan’s Industrial Production, April
May 14, 2014
  • US Producer Price Index (FD), April
  • US Housing Market Index, May
  • Euro zone Industrial Production, March
  • UK Labour Market Report, April
  • Bank of England Inflation report, May
  • Japan’s GDP, Q1 2014
May 30, 2014
  • US Personal Income and Outlays, April
  • US Chicago PMI, May
  • US Consumer Sentiment, May
  • India’s GDP, Q1 2014
May 15, 2014
  • US Consumer Price Index, April
  • US Empire State Mfg Survey, May
  • US Treasury International Capital, March
  • US Industrial Production, April
  • US Philadelphia Fed Survey, May
  • Euro zone GDP, Q1 2014
  • Euro zone Consumer Price Index, April
  • India’s WPI inflation, April
June 2, 2014
  • US ISM Mfg Index, May
  • US Construction Spending, April
  • Euro zone PMI Manufacturing Index, May
  • UK CIPS/PMI Manufacturing Index, May
  • China’s PMI Manufacturing Index, May
May 16, 2014
  • US Housing Starts / Building Permits, April
  • US Consumer Sentiment, May
  • Euro zone Merchandise Trade, March
June 3, 2014
  • US Factory Orders, April
  • US Motor Vehicle Sales, May
  • UK PMI Construction, May
  • Euro zone Consumer Price Index, May
  • Euro zone Unemployment Rate, April
  • Japan’s PMI Composite, May
May 20, 2014
  • UK Consumer Price Index, April
  • UK Producer Price Index, April
  • Bank of Japan Monetary Policy Meet
  • Japan’s Merchandise Trade, April
  • India’s CPI for rural and farm labourers, April
June 4, 2014
  • US Fed’s Beige Book, June
  • US ADP Employment Report, May
  • US International Trade, April
  • US ISM Non-Mfg Index, May
  • Euro zone GDP, Q1 2014 (Preliminary)
  • Euro zone PMI Composite, May
  • UK CIPS/PMI Services Index, May
  • China’s PMI Composite, May
May 21, 2014
  • US FOMC Minutes
  • Bank of England Policy Meeting minutes
June 5, 2014
  • European Central Bank Monetary Policy Meeting
  • Euro zone Retail Sales, April
  • Bank of England Monetary Policy Meeting
May 22, 2014
  • US Existing Home Sales, April
  • Euro zone PMI Composite Flash, May
  • UK GDP, Q1 2014 (revised)
  • UK Retail Sales, April
  • China’s PMI Flash Mfg Index, May
June 6, 2014
  • US Employment Situation, May
  • UK Merchandise Trade, April
May 23, 2014
  • US New Home Sales, April
June 9, 2014
  • China’s Consumer Price Index, May
  • China’s Producer Price Index, May
  • Japan’s Tertiary Index, April
May 27, 2014
  • US Durable Goods Orders, April
  • US S&P Case-Shiller HPI, March
  • US Consumer Confidence, May
June 10 , 2014
  • UK Industrial Production, April

US Fixed Income Markets - Overview

US treasuries ended higher with the yield on the 10 year benchmark bond falling from 2.72% on March 31 to 2.65% on April 30 due to a host of helpful economic data, tension between Russia and Ukraine, and the US Fed’s minutes. Bonds gained after the release of weak GDP growth data for Q1 2014 and weak non-farm payrolls data for March. Further, downbeat housing market indicators, including a slowdown in the US S&P Case-Shiller house price index, coupled with weak manufacturing PMI data aided sentiment for treasuries. In addition, treasuries were also boosted by the tussle between Ukraine and Russia, and the US Fed’s minutes that indicated a majority of Fed members were in favour of persisting with low interest rates. However further gains were capped by strong Chinese industrial production data and US Fed Biege book data that indicated a recovery in economic activity. Growth in US durable goods orders and retail sales also weighed on treasuries. Sentiment was also dented by a strong ADP jobs report and by the US Fed’s move to curtail its monthly bond purchases to $45 bn.

US 10 Year Govt. Bond Yield

Learning Centre– Types of Debt Instruments

Debt mutual fund investors must have noticed in the fund factsheets that debt funds invest their corpus in debt instruments such as commercial papers, corporate deposits, NCDs, bonds, gilts, etc. In this article, we will highlight what are these debt instruments and how they function.

Commercial paper (CP): This is a short term debt instrument that was introduced in India in 1990. It is not backed by any collateral, and issued primarily by high quality corporate entities. Besides corporates, primary dealers and all-India financial institutions (FIs) also issue CPs. These are issued in denominations of Rs 5 lakh or multiples of Rs 5 lakh, and their maturity ranges from seven days to 1 year. It is mandatory for CPs to be rated by credit rating agencies (CRA) before they can be issued.

Certificate of deposit (CD): This is a money market debt instrument issued in a dematerialized form or as promissory notes. Introduced in 1989, scheduled commercial banks and certain all-India financial institutions (FIs) approved by the Reserve Bank of India (RBI) can issue CDs. Maturities of CDs can vary depending on the issuer; banks issue CDs with maturities ranging from seven days to a year and FIs issues CDs with maturities ranging from one year to three years. The minimum amount that can be issued through CDs is Rs 1 lakh and in multiples of Rs 1 lakh for larger loans.

Government securities (G-Secs): These are a class of financial instruments issued by the government and backed by its full faith. Hence, they do not carry any credit risk and are therefore called gilt-edged securities or simply, gilts. Dated securities and treasury bills (T-bills) are two of the most commonly cited government securities.

  1. Dated securities: These gilts are long term instruments with a tenor of upto 30 years. Fixed rate or floating rate coupon interest is paid twice a year.
  2. T-bill: The T-bill is a money market government security issued with tenors of 91 day, 182 day, and 364 days. Because they don’t pay coupon interest, T-bills are called zero-coupon instruments.

Non Convertible Debenture (NCD): This is a debt instrument issued by a corporate entity through private placement or by public issue. The minimum maturity of an NCD is 90 days. As the name suggests, an NCD cannot be converted into shares by the holder. These offer a measure of safety to investors as these can only be issued by companies with a good credit rating.

Corporate bonds: Private and public sector companies raise funds by way of issue of corporate bonds. Such bonds may be issued through public issue or by private placement.

The following table shows CRISIL’s rating classification for long-term debt obligations:

CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division, which may, in its regular operations, obtain information of a confidential nature which is not available to CRISIL Research. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.