August 2014 | srei
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August 2014

Indian Economy Review

Indian economy grows better than expected in the April-June quarter

Boosted by robust performance by the manufacturing sector, the Indian economy grew at a better-than-expected 5.7% in the quarter ended June compared with 4.6% in the previous quarter. This is the fastest quarterly growth in nine quarters. Major domestic and global institutions also expressed their optimism on economic growth. The RBI expects GDP growth in the current fiscal to go up to 5.5% from 4.7% in the last financial year on the back of revival in economic activity and sentiments. In its 2013-14 annual report, the central bank said that the impact of deficient monsoon on growth, inflation, fiscal and trade deficits is expected to be small. Further, a United Nations report said that India's economy is expected to record stronger growth momentum of 5.5% in the current fiscal, underpinned by "solid expansion" in industrial and services sectors and impetus to economic reforms by the new government. The Organisation for Economic Cooperation and Development (OECD) said that India’s economic growth is gaining momentum with the new government initiating various measures to bolster the economy.

Domestic GDP Growth

Government unveils new programmes to transform the economy

Prime Minister Narendra Modi formally launched the 'Pradhan Mantri Jan Dhan Yojana', under which the government will provide a bank account and insurance cover to every household in the country. The government approved the umbrella programme Digital India to transform India into a digitally empowered knowledge economy. It also said that it will ensure mobile services in 55,000 unconnected villages over the next five years with an investment of Rs 20,000 cr through the Universal Service Obligation Fund. Further, India has decided to renegotiate its tax treaties with Germany, France, Singapore, Italy and South Korea to pave way for bilateral Advance Pricing Agreements with these countries.

Among other developments in the growth cause, the government notified liberalised foreign direct investment (FDI) norms for the Railways, permitting 100% FDI through the automatic route in several areas including high speed trains. However, it clarified that FDI will not be allowed in the railway operations sector. It also clarified its stand on multi-brand retail, stating that it will not entertain FDI in this sector. The government notified an increase in FDI limit to 49% through the approval route in the defence sector.

Divestment plans gather steam

The Ministry of Petroleum & Natural Gas has accorded an in-principle approval for 5% stake sale in ONGC which may fetch the government about Rs 18,000 cr to meet its disinvestment target for the current fiscal. The government is looking to sell 5% stake in SAIL and 10% each in Rashtriya Ispat Nigam Ltd (RINL) and Hindustan Aeronautics Ltd (HAL) in the current fiscal, besides an outright sale of Tyre Corporation of India. It has identified three sick PSUs - Praga Tools Ltd, Bharat Heavy Plates Vessels Ltd and Bharat Refractories Ltd - which will be either merged with or taken over by SAIL, BHEL and HMT. Meanwhile, the Department of Telecommunications plans to raise Rs 15,000 cr through an auction of airwaves in all the bands of 2G and 3G in the current fiscal.

Retail inflation numbers rise slightly in July even as wholesale prices fall

India’s retail inflation measured by the Consumer Price Index inched up to 7.96% in July driven by surging prices of vegetables, fruit and milk, from an upwardly revised 7.46% in June. However, the Wholesale Price Index (WPI)-based inflation declined to a five-month low of 5.19% in July from 5.43% in the previous month. Meanwhile, the government set up a committee to devise a new barometer called the Producer Price Index as a replacement for WPI.

Other major developments in the month

  • Asian Development Bank will lend up to $9 bn to India over the next three years to help in infrastructure development, manufacturing, skill development and expanding trade.
  • The government has lifted the restriction of one subsidised cooking gas cylinder per household in a month, saying consumers can avail of their quota of 12 cylinders at any time of the year.
  • The government has decided to double the retail investor quota under the Offer For Sale route to 20%.
  • The Ministry of Environment has eased rules for mining, roads, power and irrigation projects and other industrial sectors.
  • The government will pay fuel retailers Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) Rs 11,000 cr in subsidy for the first quarter. It has also announced a diesel subsidy for irrigation in states where rainfall shortage is more than 50% to protect the standing kharif crops.
  • The government unveiled the Company Law Settlement Scheme under which no penal action would be taken against entities who have defaulted on their statutory filings under the Companies Act; but this benefit would be available only if the entities have availed this offer for a period of two months.
  • The Employees’ Provident Fund Organisation (EPFO) has decided to bring into effect higher minimum monthly pension of Rs 1,000 and higher wage ceiling of Rs 15,000 for social security schemes from September 1. EPFO will retain 8.75% interest rate on provident fund deposits for its over 50 mn subscribers in 2014-15.
  • The Central Board of Trustees of the EPFO has raised the upper limit for investment in government bonds to 100% from the present 55%. It has rejected a proposal to allow putting employees’ money in relatively risky equities or ETFs. The Central Board of Direct Taxes has set up a high-level committee to scrutinise all income tax cases arising out of the retrospective tax amendment.

Major regulatory developments in the month

  • The RBI has asked asset reconstruction companies to invest at least 15% in securities receipts (SRs) issued by them on the purchase of distressed assets from banks.
  • The RBI has relaxed takeout financing norms for existing infrastructure loans by halving the minimum takeout requirement to 25% from 50%.
  • The central bank allowed mortgage guarantee companies to use contingency reserves for the purpose of meeting and making good the losses suffered by mortgage guarantee holders. It also issued guidelines for a unified national bill payment system called Bharat Bill Payment System (BBPS).
  • The Competition Commission of India (CCI) has imposed a penalty of Rs 2,545 cr on 14 top carmakers in India for violating trade norms in the spare-part and after-sales service market.
  • The Telecom Regulatory Authority of India (TRAI) has fixed the access charge international long-distance operators (ILDO) pay local ones at 40 paisa a minute for wireless services and Rs 1.2 a minute for wireline services.
  • The Supreme Court declared the entire allocation of coal blocks granted from 1993 until 2010 illegal.

Among key economic indicators released in the month,

India’s Index of Industrial Production slowed to 3.4% year on year in June, a drop from the upwardly revised 5% growth in May. India’s core sector growth slowed to 2.7% in July, after expanding at an annualized 7.3% in June. India’s trade deficit in July was $12.23 bn, higher than $11.76 bn in June. Exports rose 7.3% to $27.7 bn in July compared with $25.8 bn in the corresponding period of last year, while imports rose 4.3% to $40 bn in July compared with $38.3 bn in the corresponding period of last year. The Federation of Indian Export Organisation (FIEO) said that India’s exports could surpass the $350 bn target this fiscal as growth in the manufacturing sector is expected to pick up. India's fiscal deficit in the first four months of the current financial year was Rs 3.25 lakh cr, or 61.2% of the full-year target; the deficit was 62.8% during the comparable period in the previous fiscal year. Current Account Deficit (CAD) narrowed sharply to $7.8bn (1.7% of the GDP) in the April-June quarter from $21.8 bn (4.8% of GDP) in the corresponding quarter last year; the sharp correction in CAD was driven by a pick-up in exports coupled with a contraction in imports. FDI flows to India surged by about 34% to $1.92 bn in June 2014 compared with $1.44 bn in the same month last year. India’s HSBC Manufacturing PMI rose to a 17-month high of 53 in July, up from 51.5 in June, while services PMI was 52.2 in July, down from June's 17-month peak of 54.4.

Indicators Current Previous
Monthly WPI Inflation 5.19% (July 2014) 5.43% (June 2014)
Industrial Growth 3.4% (June 2014) 5% (May 2014)
Exports $107.84bn (April-July 2014) $99.28bn (April-July 2013)
Imports $153.15bn (April-July 2014) $159.20bn (April-July 2013)
Trade Deficit -$45.31bn (April-July 2014) -$59.91bn (April-July 2013)
Gross Tax Collections Rs 2,58,873cr (April-July 2014) Rs 2,45,323cr (April-July 2013)

IIP Growth

IIP Growth

  • India’s Index of Industrial Production slowed to 3.4% year on year in June, a drop from the upwardly revised 5% growth in May.

IIP-Core Sector Growth

IIP Core Sector Growth

  • India’s core sector growth slowed to 2.7% in July, after expanding at an annualized 7.3% in June.

Fiscal Deficit

Fiscal Deficit

  • India's fiscal deficit in the first four months of the current financial year was Rs 3.25 lakh cr, or 61.2% of the full-year target; the deficit was 62.8% during the comparable period in the previous fiscal year.

Global Economy Review

Global economy on a steady growth path

The Organisation for Economic Cooperation and Development (OECD) said that growth momentum in most developed economies is stable although Germany and Japan have been losing steam.

The US posts sharp growth in Q2; Fed in no rush to raise interest rates

The US economy expanded 4.2% in Q2 2014 compared with an upwardly revised contraction of 2.1% in Q1 2014. Despite acknowledging improvement in the economy, the US Federal Reserve Chief Janet Yellen stated that the central bank is awaiting more evidence on the health of the labour market before deciding when to raise the interest rates. However, the minutes of the US Fed’s latest meeting released earlier in the month stated that the majority of Fed policymakers believe the US economy is improving and the bank should start considering how it is going to start raising interest rates.

World GDP Growth

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Major Global Central Bank
US GDP 4.2% Q2 2014 -2.1% Q1 2014 US Fed Funds Rate 0-0.25%
US unemployment 6.1% August 2014 6.2% July 2014 Bank of England 0.50%
UK GDP 3.2% Q2 2014 3% Q1 2014 European Central Bank 0.05%
Euro Zone GDP 0.7% Q2 2014 1% Q1 2014 Japan Benchmark Rate 0-0.10%
Japan GDP -7.1% Q2 2014 6.1% Q1 2014    
China GDP 7.5% Q2 2014 7.4% Q1 2014    
Singapore’s GDP 2.4% Q2 2014 4.7% Q1 2014    

Key US economic indicators

  • The trade deficit shrank to a seasonally adjusted $41.54 bn in June from an upwardly revised deficit of $44.66 bn in May.
  • Industrial production rose 0.4% in July, unchanged from June.
  • Retail sales were flat in July after increasing 0.2% in June.
  • Labour productivity increased 2.5% at a seasonally adjusted annual rate in the June quarter after plummeting 4.5% in the first quarter while labour costs rose just 0.6% in Q2 after surging 11.8% in the first quarter.
  • Non-farm payrolls advanced a seasonally adjusted 142,000 in August, compared to 212,000 in July; the unemployment rate fell to 6.1% in August from 6.2% in July.
  • Annual inflation increased 2% in the 12 months through July after advancing 2.1% in June.
  • On the housing front, existing home sales increased 2.4% to a seasonally adjusted 5.15 mn units in July from 5.03 mn in June while pending home sales rose 3.3% in July after a 1.3% decrease in June.


Eurozone economic recovery loses steam

Economic recovery in the Eurozone lost its steam after the latest data showed that the bloc’s GDP rose 0.7% annually in Q2, lower than 1% growth in Q1. The major reason for slowdown was a 0.2% contraction in Germany’s GDP in the latest quarter. In a key development, the European Central Bank (ECB) President Mario Draghi asked for more emphasis on fiscal stimulus than austerity. He said that it would help if in the overall policy stance, fiscal policy could play a greater role along with the ECB's monetary policy. In an effort to stimulate lending in the Euro zone, the European Central Bank cut its benchmark interest rate to 0.05% and will soon begin buying packages of bank loans.

Key Eurozone economic indicators:

  • The trade balance was a surplus of 16.8 bn euros in June vs a surplus of 15.4 bn euros in May and 15.7 bn euro surplus in June 2013.
  • Industrial production declined by a seasonally adjusted 0.3% in June, after dropping 1.1% in May.
  • Annual Consumer Price Index came in at 0.3% in August compared with 0.4% in July.
  • Retail sales surged 2.4% after a downwardly revised 0.6% rise in May, posting its strongest growth since March 2007.
  • The unemployment rate was unchanged at 11.5% in July compared with the previous month.

The UK’s economic growth higher at 3.2% in the second quarter

The UK’s Office for National Statistics said that the country’s economy grew 3.2% in Q2, slightly higher than the original 3.1% estimate. The British Chamber of Commerce said that growth for 2014 will reach its highest level seen since 2007. Meanwhile, for the first time in three years, the Bank of England’s (BoE’s) Monetary Policy Committee (MPC) did not unanimously vote to keep interest rates at the historic low of 0.5% with two members voting to increase rates to 0.75% at its latest meeting. On the inflation front, the BoE expects inflation to increase slightly to 1.9% by the end of 2014 as per its latest inflation report compared with its May projection of 1.8%.

Key UK economic indicators:

  • The visible trade deficit increased to 9.4 bn pounds in June from 9.2 bn pounds in May.
  • Industrial output rose 0.3% in June compared with a 0.6% fall in May.
  • Retail sales increased by a seasonally adjusted 0.1% in July after increasing 0.2% in June.
  • Annual consumer prices grew 1.6% in the year to July 2014, down from 1.9% in June.
  • The UK’s ILO unemployment rate was 6.4% for the three months to June, lower than 6.5% for the three months to May.
  • According to the UK’s labour market report, there were 2.08 mn unemployed people in the June quarter, 132,000 fewer than in the March quarter and 437,000 less than a year earlier.


Weak manufacturing and property sectors weigh on the Chinese economy

Slowdown in manufacturing activities and slump in the property market continue to weigh on China, highlighting weakness in the world’s fastest growing economy. Chinese manufacturing growth gauged by HSBC/Markit Flash Manufacturing Purchasing Managers' Index (PMI) fell to 50.3 in August from July's 18-month high of 51.7. National Bureau of Statistics said that home prices fell in 64 of the 70 surveyed cities in July from a month earlier. On a positive, however, China reported record trade surplus of $47.3 bn in July, up from $31.6 bn in June.

Key Chinese economic indicators

  • Industrial production expanded 9% annually in July, slower than 9.2% growth recorded in June.
  • Retail sales rose 12.2% annually in July compared with a 12.4% rise in June.
  • Annual Consumer Price Index rose 2.3% in July from a year earlier, unchanged from June.

Japan GDP growth slows after sales tax hike

Japan's GDP fell 7.1% in Q2, a sharp reversal from the 6.1% surge in Q1, as the sales tax hike from 5% to 8% came into force in April. The Bank of Japan (BoJ) said that it would maintain its aggressive monetary easing measures to combat stubborn deflation and stimulate the country’s economy. On a positive note, however, the BoJ’s latest monetary policy meeting minutes showed that the country's economic recovery is on track.

Key Japanese economic indicators:

  • The current account deficit was 399.1 bn yen in June compared with a 377.7 bn yen surplus in the same month a year earlier.
  • The merchandise trade deficit was 963.99 bn yen in July, following a 823.2 bn yen shortfall in June; exports were up 3.9% year-on-year to 6.188 trillion yen, while imports were up an annual 2.3% to 7.152 trillion yen.
  • Industrial production rose 0.2% in July from the previous month.
  • Annual consumer prices rose 3.3% from a year earlier in July, the same pace as in June.
  • The unemployment rate edged higher to 3.8% in July from 3.7% in June.

Singapore economy grew faster than expected

Singapore’s economy expanded faster than expected by 2.4% (annual) in Q2 2014, better than the advance estimate of 2.1%. Prime Minister Lee Hsien Loong said that Singapore's economy grew 3.5% in the first half and was on track for 2.5-3.5% expansion in 2014. Among key economic indicators, non-oil domestic exports fell 3.3% year-on-year in July, after falling 4.6% in June and 6.6% in May. Industrial production increased for the second straight month in July by 3.3% following 0.8% growth in June.

Domestic Fixed Income Review

Domestic G-sec Yield

6-Month LIBOR

Interbank call money rates fluctuated in the broad range of 7.00-9.00% during the month. The rates were down earlier as the central bank held a 14-day term repo for a notified amount of Rs 61,000 cr on August 1. The government’s food subsidy payments also ensured comfortable liquidity. During the month, the central bank provided an additional Rs 10,000 cr through two overnight variable rate repo auctions, besides infusing Rs 15,000 cr through a term repo of seven-day tenor to support liquidity. Rates also remained on the lower side on account of inflows from interest payments for government bonds and state development loans, and news that the government has cut its borrowing for the August-September period. Further decline in the call money rates was, however, restricted on account of outflows to the tune of Rs 25,000 cr towards payment of excise and service tax, and intermittent demand for funds from banks to meet their daily and extended weekend reserve requirements.

Indian government bond prices (gilts) ended lower in the month amid volatility, with the yield of the new 10-year 8.40% 2024 paper ending at 8.56% on August 28, 2014 compared with 8.50% on July 31, 2014. Meanwhile, the yield of the erstwhile benchmark paper 8.83% 2023 ended flat at 8.72% on August 28, 2014 as compared with previous month’s close. Gilts were down earlier in the month as the RBI’s hawkish policy stance quelled all hopes of an interest rate cut in the near future. A sporadic rise in crude oil prices after the US ordered air strikes against Iraq weighed on prices. Regular profit taking by participants pulled down the gilts further. Sentiments were also hit after data from the NSDL showed foreign investors had exhausted over 97% of the permitted gilt investment limits in the open category, raising concerns that the gilt investment limit for foreign investors might not be raised.

Further decline in gilts was, however, restricted on the rupee’s recovery against the dollar and after the RBI released a revised calendar for the August-September period, indicating a reduction of Rs 2,000 cr per week in borrowing through the sale of dated securities. Prices got further support on falling global crude oil prices amid easing tensions in Ukraine and on intermittent value buying.

Among major developments in the month,, the RBI has revised the liquidity management framework for banks. It will conduct 14-day term repo auctions four times in a reporting fortnight every Tuesday and Friday effective September 5. RBI Deputy Governor H.R. Khan said that the central bank is discussing the possibility of clearing Indian debt on Euroclear, the world's largest securities settlement system. According to the US Treasury Department data, India held American government securities worth nearly $73 bn in June, which is also the highest level in one year. According to SEBI data, fund raising by Indian companies through private placement of corporate debt securities or bonds in July came down to around Rs 2,900 cr, the lowest in 11 months. The RBI has eased norms for overseas investors buying government bonds, allowing them to buy the instruments via the secondary market without the need for going through exchange-registered stock brokers. The SEBI released a discussion paper for higher disclosure standards pertaining to public offer and listing of Securitised Debt Instruments (SDI). The Insurance Regulatory Development Authority (IRDA) has permitted insurance companies to invest in onshore rupee bonds issued by Asian Development Bank (ADB) and International Finance Corporation (IFC).


Fixed Income Indicators

Rates & Liquidity

  28-Aug-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) 9,464 16,173 20,713
LAF o/s Rev Repo (Rscr) 4,358 5,543 4,811

Overnight                                                   Rate(%)

  28-Aug-14 1 Week Ago 1 Month Ago
Mibor 8.02 8.20 9.00
Call 8.65 7.10 8.70
CBLO 8.16 7.74 8.93
OIS 1Y 8.46 8.46 8.41
OIS 5Y 8.05 8.04 7.91

CDs                                                                       Yield(%)

  28-Aug-14 1 Week Ago 1 Month Ago
1-Month 8.27 8.32 8.62
3-Month 8.74 8.81 8.75
6-Month 8.84 8.96 8.95
1-Year 9.10 9.09 9.02

CPs                                                   Yield(%)

  28-Aug-14 1 Week Ago 1 Month Ago
1-Month 8.54 8.55 8.79
3-Month 9.00 9.12 9.01
6-Month 9.25 9.37 9.32
1-Year 9.48 9.52 9.46

Short Term Bonds                                                       Yield(%)

  28-Aug-14 1 Week Ago 1 Month Ago
1 Y G-Sec 8.64 8.63 8.65
1 Y AAA 9.02 9.07 9.00
1 Y AA 9.53 9.58 9.51
2 Y G-Sec 8.46 8.46 8.25
2 Y AAA 9.15 9.16 9.13
2 Y AA 9.64 9.65 9.62

Long Term Bonds                                                   Yield(%)

  28-Aug-14 1 Week Ago 1 Month Ago
5 Y G-Sec 8.61 8.59 8.46
5 Y AAA 9.32 9.36 9.26
5 Y AA 9.97 10.01 9.91
10 Y G-Sec 8.56 8.51 8.43
10 Y AAA 9.35 9.33 9.24
10 Y AA 10.16 10.14 10.05

Top 5 Graded G-Secs                                         Yield(%)

  28-Aug-14 1 Week Ago 1 Month Ago
8.83% CGL 2023 8.56 8.56 8.43
08.28% CGL 2027 8.72 8.70 8.71
08.24% CGL 2027 8.72 8.70 8.61
08.12 GS 2020 8.63 8.63 8.46
08.35% CGL 2022 8.82 8.83 8.76


  28-Aug-14 1 Week Ago 1 Month Ago
USD/INR 60.50



EURO/INR 79.86 80.56 80.74
GBP/INR 100.35 100.72


100 JPY/INR 58.27 58.53 59.00
USD/EURO 0.76* 0.75 0.74

* Data with respect to August 29



10 Year G-sec movement


Corporate Bond Yield


Corporate AAA, AA Bond Spreads

Economic Events Calendar

September 11, 2014
  • US Treasury Budget, August
September 26, 2014
  • US GDP, Q2 2014 (Final)
  • US University of Michigan Consumer Sentiment, September - Final
September 12, 2014
  • US Retail Sales, August
  • US Import and Export Prices, August
    US University of Michigan Consumer Sentiment, September
  • US Business Inventories, July
  • Euro zone Industrial Production, July
  • China’s Industrial Production, August
  • China’s Retail Sales, August
  • India’s Index of Industrial Production, July
  • India’s Consumer Price Index for Combined, Rural, and Urban, August
September 29, 2014
  • US Personal Income and Outlays, August
  • US Pending Home Sales Index, August
  • US Dallas Fed Mfg Survey, September
  • Euro zone Economic Sentiment, September
  • China’s PMI Manufacturing Index, September
  • Japan’s Unemployment Rate, August
  • Japan’s Industrial Production, August
  • Japan’s PMI Manufacturing Index, September
September 15, 2014
  • US Industrial Production, August
  • US Empire State Manufacturing (Mfg) Survey, September
  • Euro zone Merchandise Trade, July
  • India’s WPI Inflation, August
September 30, 2014
  • US S&P Case-Shiller HPI, July
  • US Chicago PMI, September
  • UK GDP, Q2 2014 (Final)
  • Euro zone Harmonized Index Of Consumer Prices, September
  • Euro zone Unemployment Rate, August
  • China’s CFLP Manufacturing PMI, September
  • Japan’s Tankan Survey, Q3 2014
  • India’s RBI Fourth Bi-Monthly Monetary Policy Review
  • India’s Balance of Payments
September 16, 2014
  • US Producer Price Index – Final Demand, August
  • US Treasury International Capital, July
  • UK consumer price index, August
  • UK Producer Price Index, August
October 1, 2014
  • US ADP Employment Report, September
  • US ISM Mfg Index, September
  • US PMI Manufacturing Index, September
  • US Motor Vehicle Sales, September
  • US Construction Spending, August
  • Euro zone GDP, Q2 2014 (Final)
  • Euro zone PMI Manufacturing Index, September
  • UK CIPS/PMI Manufacturing Index, September
September 17, 2014
  • US Federal Open Market Committee (FOMC) Meeting Announcement
  • US Consumer Price Index, August
  • US Housing Market Index, September
  • Euro zone Harmonized Index Of Consumer Prices, August
  • Bank of England meeting minutes, Sept
  • UK Labour Market Report, August
  • Japan’s Merchandise Trade, August
October 2, 2014
  • US Factory Orders, August
  • European Central Bank Monetary Policy Review
  • Euro zone Producer Price Index, August
  • Japan’s PMI Composite, September
September 18, 2014
  • US Housing Starts, August
  • US Philadelphia Fed Survey, September
  • UK Retail Sales, August
October 3, 2014
  • US Employment Situation, September
  • US ISM Non-Mfg Index, September
  • US PMI Services Index, September
  • US International Trade, August
  • Euro zone PMI Composite, September
  • UK CIPS/PMI Services Index, September
  • Euro zone Retail Sales, August
September 19, 2014
  • US Leading indicators, August
  • Japan’s All Industry Index, July
  • UK Public Sector Finances, August
October 6, 2014
  • Bank of Japan Monetary Policy Review
September 22, 2014
  • US Existing Home Sales, August
  • Euro zone Consumer Confidence Flash, September
  • China’s PMI Flash Mfg Index, September
October 7, 2014
  • US Consumer Credit, August
  • UK Industrial Production, August
  • China’s PMI Composite, September
September 23, 2014
  • US Consumer Confidence, September
  • US Manufacturing PMI Index Flash, September
  • Euro zone PMI Composite Flash, September
  • Japan’s PMI Manufacturing Index Flash, September
October 8, 2014
  • US FOMC Minutes
  • Japan’s Machine Orders, August
September 24, 2014
  • US New Home Sales, August
October 9, 2014
  • Bank of England Monetary Policy Review
  • Bank of Japan Monetary Policy Minutes
  • Japan’s Tertiary Index, August
September 25, 2014
  • US Durable Goods Orders, August
  • US PMI Services Flash, September
  • Japan’s Consumer Price Index, August
October 10, 2014
  • US Import and Export Prices, September
  • US Treasury Budget, September
  • UK Merchandise Trade, August
  • India’s Index of Industrial Production, August

US Fixed Income Markets - Overview

US Treasury prices rose sharply in the month taking cues from US Fed Chief Janet Yellen, who said that the US labor markets remain on the path of recovery and that the central bank needs to move with caution on when to raise interest rates. Treasuries further rose on hopes that the European Central Bank will bring in more stimulus to revive flagging growth in the Euro zone. Some domestic economic indicators, including weak retail sales and a marginal increase in the unemployment rate, eased fears of an interest rate increase and augured well for bonds. The safe haven appeal of treasuries was also boosted by ongoing geopolitical tensions in Ukraine, Russia, and Iraq. However, some labor market data, including a rise in labor costs, labor productivity, and the employment cost index supported the view of a faster than anticipated interest rate hike, and weighed on treasuries. The safe haven appeal of US debt was also dented by strong US durable goods orders and US ISM non-manufacturing PMI data. The yield on the 10-year benchmark bond fell from 2.56% on July 31 to 2.34% on August 29.

US 10 Year Govt. Bond Yield

Learning Centre– Dynamic Bond Funds

The Reserve Bank, in its most recent monetary policy review, reiterated its commitment to the disinflationary path of taking headline CPI inflation to 8% by January 2015 and 6% by January 2016. The central bank added that upside risks to inflation remained, even as it retained its benchmark interest rate. With headline inflation rising to 7.96% in July, there is some uncertainty about what the banking regulator will do in its upcoming policy review.

The RBI’s interest rate decisions have a broad impact on investments, particularly fixed income portfolios. In an uncertain interest rate environment, investors struggle to decide whether they should invest in short maturity or long maturity funds. Dynamic Bond Funds are ideal in such a scenario.

Dynamic Bond Funds

Dynamic Bond Funds help negate interest rate uncertainty by enabling investors to take exposure to both long term and short term instruments. Fund managers alter the allocation between short term and long term papers depending on their interest rate outlook. Thus, if they expect interest rates to fall in the near future, they increase the allocation to long tenor papers like corporate bonds and dated securities (gilts). If on the other hand, short term interest rates are expected to rise, they increase the allocation to money market instruments like Commercial Papers (CPs), and Certificates of Deposits (CDs). This strategy helps generate a return in both rising and falling interest rate scenarios.

Summing up

It is difficult for retail investors to predict and take a call on interest rates. Dynamic bond funds fill this gap as fund managers take the call and tactically manage interest rate risk to earn superior returns. However, investors must note that the performance of such funds depends on the manager’s ability to correctly predict the direction of interest rates. Hence, investors are advised to check the track record of the fund house and the fund manager before opting for such funds.

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.