August 2016 | srei

August 2016

Highlights of RBI's Third Bi-monthly Monetary Policy Statement 2016-17

It has been decided to:

  • keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.5%;
  • consequently, the reverse repo rate under the LAF will remain unchanged at 6%, and the marginal standing facility (MSF) rate and the bank rate will remain steady at 7%.
  • keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL); and
  • continue to provide liquidity as required but progressively lower the average ex ante liquidity deficit in the system from 1% of NDTL to a position closer to neutrality.

Indian Economy Review

GST Bill finally sees the light of day

The Parliament cleared the long awaited constitutional amendment bill for goods & services tax (GST). The government expects GST to result in better tax compliance due to robust IT infrastructure and consumers to benefit as the overall tax burden on most commodities will come down. World Bank Chief Economist and Senior Vice-President Kaushik Basu said GST will be the biggest benefit for Indian growth and it will help lower transaction costs. Finance Minister Arun Jaitley said the government could consider an anti-profiteering clause to ensure the benefits of GST are passed on to consumers and prices do not jump once the levy is rolled out. The Finance Ministry assured all efforts are being made to roll out GST from April 1, 2017.

 Domestic GDP Growth

Growth forecasts remain optimistic for Indian economy

The ongoing turmoil in the global economy affected economic growth in India, with the gross domestic product (GDP) growing at 7.1% in the first quarter of 2016-17 against 7.5% in the first quarter of 2015-16 and 7.9% in the previous quarter. However, domestic officials and financial institutions continued to be optimistic about future growth prospects. Niti Aayog Vice-Chairman Arvind Panagariya expects India's economic growth to accelerate to 8% in the current fiscal thanks to a good monsoon, policy reforms and Prime Minister Narendra Modi's focus on implementation at the grassroots level. The Reserve Bank of India (RBI) retained growth projection for the current fiscal at 7.6%. Standard & Poor's (S&P) said supportive monetary and fiscal policies can help India achieve 8% growth in the next three financial years. Separately, according to a report by New World Wealth, India has figured among the top 10 wealthiest countries in the world with a total individual wealth of $5,600 billion while the US tops the chart.

Inflation advances in July

India's retail inflation measured by the Consumer Price Index (CPI) for July hardened for the fourth straight month to a two-year high of 6.07%, primarily driven by high food prices, compared with 5.77% in June. Wholesale prices also touched a two-year high in July, gaining 3.55% from a year earlier on higher food prices compared to 1.62% growth in June. In an important development, the government officially notified a retail inflation target of 4% (+/-2%), until 2021 in line with the agreement reached with the RBI. Meanwhile, the RBI launched the September round of inflation expectations survey of households covering 18 cities.

The Cabinet took the following key decisions:

  • Approved a new policy wherein foreign investors bringing in at least Rs 10 crore capital will be eligible for residency status, easier visa regime, and employment for family members, among other benefits.
  • Approved measures to help quickly resolve disputes, pump in liquidity and deal with stressed assets in the construction sector.
  • Approved the liberalisation of FDI norms for non-banking financial companies.
  • Approved a draft law to bring taxi aggregators under the ambit of Motor Vehicles Act.
  • Approved the Motor Vehicle (Amendment) Bill, 2016 providing for hefty penalties for violation of road safety rules.
  • Approved a spectrum usage charge (SUC) of 3% of adjusted gross revenue (AGR), excluding revenues from wire-line services.
  • Approved nine projects worth about Rs 24,000 crore in nine states for expansion of the railway network and connectivity across the country.
  • Allowed the National Highways Authority of India to monetise public funded national highway projects.

Other important developments in the month

India and the US signed a logistics defence pact that will enable their militaries to use each other's assets and bases for repair and replenishment of supplies. Prime Minister Narendra Modi said the government will bear healthcare expenses of up to Rs 1 lakh annually of BPL families. He also reviewed the performance of infrastructure projects and called for a transformational leap to improve the country's infrastructure.

The Parliament passed a bill to amend debt recovery laws and make them more time-bound and effective. It also passed the Benami Transactions (Prohibition) Amendment Bill, 2015. The Finance Ministry issued fresh expenditure guidelines, directing ministries to prepare spending plans and seek prior notice for any single payment of over Rs 5,000 crore. It issued new norms for efficient appraisal and approval of public funded schemes as well as to improve the delivery of goods and services to citizens. It also accepted the railway minister's proposal to merge the rail budget with the general budget. The government is mulling advancing the Union Budget by a month to January-end. Further, it said that banks and financial institutions need not enforce "closure" of accounts by August 31, 2016 in respect to those cases where "self-certification" had not been obtained and due diligence not completed. The Finance Ministry made it mandatory to pay vendors within 10 days of receipt of goods procured through the government's online marketplace. The Disinvestment Department issued a revised request for proposal inviting applications from merchant bankers for selling more than Rs 60,000 crore worth of shares it holds in many of blue chip companies through the Specified Undertaking of Unit Trust of India (SUUTI). The government aims to mobilise more than Rs 50,000 crore over the next few months through a unique road asset monetisation exercise.

The government decided to bear the transaction cost for all payments made to it through debit or credit cards and net banking. Further, it appointed Urjit Patel as the new governor of the RBI. The government will transfer about Rs 1.3 lakh crore directly into the accounts of beneficiaries under the Pradhan Mantri Awas Yojana over three years for construction of 10 million houses. It is preparing a contingency plan to support public sector banks should they collapse under the burden of bad loans.

The Centre announced a hike in minimum wage for unskilled non-farm workers of the Central government to Rs 350 a day from the current Rs 246. It also asked the states to extend cooperation in rolling out the new initiative to implement direct benefit transfer of fertiliser subsidy to farmers. The government will bear the entire fuel subsidy burden, starting this fiscal. It asked oil marketing companies not to transfer LPG subsidy to the bank accounts of eligible households unless their accounts are seeded with Aadhaar. The Aviation Ministry plans to launch a website where passengers will be able to register their grievances. The Centre plans to set up 50 regional airports over the next three years to improve connectivity.

Among regulatory developments

The RBI and SEBI together launched a portal called 'http:www.sachet.rbi.org.in' to check unauthorised collection of deposits. The RBI formed a committee to study the state of household finance in India to evaluate future demand for financial products. The central bank extended the deadline for Bharat Bill Payment Operating Units (BBPOU) applicants to December 31 to enable them to meet the requirement for the starting paid-up capital.

The Department of Telecom (DoT) suspended spectrum sharing, trading and liberalisation activities until the provisional results of the upcoming spectrum auction are declared. DoT cleared carrying out electronic know your customer (KYC) norms using Aadhaar by telecom companies. The Telecom Regulatory Authority of India (TRAI) launched a portal that enables users measure quality parameters such as call drops, call and network quality of every operator in their locality. It also allowed increase of validity for mobile data packs to 365 days from the current up to 90 days, to boost usage by marginal consumers and also attract first-time Internet users.

National Pharmaceutical Pricing Authority (NPPA) cut the prices of several essential medicines by up to 35%. Competition Commission of India (CCI) asked 11 cement companies and their lobby group Cement Manufacturers Association (CMA) to pay a fine of Rs 6714 crore for alleged cartelisation.

Among key economic indicators released in the month

India's industrial output, measured by Index of Industrial Production (IIP) for June, improved to 2.1% versus 1.2% in May. Infrastructure output growth slowed to 3.2% in July, mainly dragged down by a slowdown in production of electricity, cement and fertiliser, and compared to 5.2% growth in June. Fiscal deficit touched Rs 3.93 lakh crore in the first four months of 2016-17, constituting 73.7% of the budget estimates (BE) for 2016-17, as against Rs 3.85 lakh crore in the corresponding period of the previous year (69.3% of BE for the year). Meanwhile, the government said that meeting the FY17 fiscal deficit target of 3.5% of the GDP will be a challenge due to additional spending on wages, following the implementation of the Seventh Pay Commission's recommendations. Exports fell 6.8% to $21.6 billion in July, while imports fell 19% to $29.4 billion leading to a trading deficit of $7.8 billion, compared with $8.1 billion in June. The government's direct tax collections grew 24.01% to Rs 1.59 lakh crore in April-July 2016, while indirect tax collections increased 29.9% to Rs 2.72 lakh crore for the same period.

India's Nikkei manufacturing Purchasing Managers' Index (PMI) rose to 51.8 in July from 51.7 in June, while services PMI recovered to a three-month high of 51.9 in July compared to 50.3 in June.

Indicators Current Previous
Monthly WPI Inflation 3.55% (Jul 2016) 1.62% (Jun 2016)
Industrial Growth 2.1% (Jun 2016) -1.2% (May 2016)
Exports $87.00bn (April - July 2016) $90.27bn (April - July 2015)
Imports $114.00bn (April - July 2016) $136.25bn (April - July 2015)
Trade Balance -$27.00bn (April - July 2016) -$45.98bn (April - July 2015)
Gross Tax Collections Rs 3,86,439cr (April-July 2016-17) Rs 3,05,110cr (April-July 2015-16)

IIP Growth

IIP Growth

  • India's industrial output, measured by Index of Industrial Production (IIP) for June, improved to 2.1% versus 1.2% in May.

IIP-Core Sector Growth

Core IIP Growth

  • Infrastructure output growth slowed to 3.2% in July, mainly dragged down by a slowdown in production of electricity, cement and fertiliser, and compared to 5.2% growth in June.

Fiscal Deficit

Fiscal Deficit

  • Fiscal deficit touched Rs 3.93 lakh crore in the first four months of 2016-17, constituting 73.7% of the budget estimates (BE) for 2016-17, as against Rs 3.85 lakh crore in the corresponding period of the previous year (69.3% of BE for the year).

Global Economy Review

US Fed says case for interest rate hike stronger

US Federal Reserve Chair Janet Yellen, at the international meeting of central bankers in Jackson Hole, Wyoming, said that the case for interest rate hike has strengthened, but refrained from giving a time frame. She said the US economy was nearing the Fed's statutory goals of maximum employment and price stability. The US economic growth in Q2 2016 was lowered to an annual rate of 1.1% from the earlier forecast of 1.2%.

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Latest Key Interest Rates
US GDP 1.1% Q2 2016 0.8% Q1 2016 US Fed Funds Rate 0.25-0.50%
US unemployment 4.9% August 2016 4.9% July 2016 Bank of England 0.25%
UK GDP 2.2% Q2 2016 2.0% Q1 2016 European Central Bank 0.00%
Euro Zone GDP 1.6% Q2 2016 1.7% Q1 2016 Japan Benchmark Rate -0.10%
Japan GDP 0.7% Q2 2016 2.0% Q1 2016    
China GDP 6.7% Q2 2016 6.7% Q1 2016    
Singapore's GDP 2.1% Q2 2016 2.1% Q1 2016    

Key economic indicators

  • Trade gap narrowed to a seasonally adjusted $59.3 billion in July from $64.5 billion in June.
  • Industrial output increased 0.7% in July after a downwardly revised 0.4% increase in June.
  • The Consumer Price Index (CPI) rose 0.8% annually in July after increasing 1% in June.
  • Retail sales were flat in July after a revised reading of 0.8% growth in June.
  • Non-farm payrolls rose by 151,000 in August following a 275,000 gain in July; the jobless rate was steady at 4.9%.
  • In the housing sector, new home sales surged to a seasonally adjusted annual rate of 654,000 units in July, the highest level since October 2007, and compared to June's sales pace of 582,000 units. Existing home sales decreased to a seasonally adjusted rate of 5.39 million in July compared to June's revised 5.57 million.

Eurozone confirms 0.3% quarterly growth in Q2 2016

Growth in Eurozone for Q2 2016 was confirmed at 0.3% on quarter, down from 0.6% growth in Q1. On a year-on-year (y-o-y) basis, the economy grew 1.6% in Q2 after 1.7% expansion in Q1. The minutes of European Central Bank's (ECB's) latest meeting stated that the Brexit vote has created headwinds for the region and also hinted at a possibility of further monetary policy action in its September 2016 meeting.

Key economic indicators

  • The trade surplus came in at 29.2 billion in June against 25.5 billion euro surplus a year ago.
  • Industrial output rose 0.6% in June after falling 1.2% in May.
  • The manufacturing PMI was 51.8 in August compared to 52 in July.
  • Annual inflation came in at 0.2% in August, stable compared with July. The unemployment rate was unchanged at 10.1% in July from the previous month.
  • The unemployment rate was 10.1% in June 2016, stable compared to May 2016 and down from 11.0% in June 2015.
  • Retail sales were flat in June versus growth of 0.4% in May.

Bank of England lowers interest rate to record low

In order to fight the recession risk after Brexit, the Bank of England (BoE) revised the key interest rate to a record low of 0.25% from 0.5%. The central bank's aggressive measures include expansion of its quantitative easing program to 435 billion pounds from 375 billion pounds and a corporate bond-buying plan of up to 10 billion pounds. The BoE predicted that the annual inflation rate over the next three years would surpass its policy target of 2%, reaching 2.4% in 2018, as a result of the falling value of the pound. The bank also slashed GDP growth forecast for 2017 and 2018 to 0.8% and 1.8%, respectively, from the earlier projection of 2.3% growth for each year.

Key economic indicators

  • The public sector net borrowing (excluding public sector banks) decreased by 3.0 billion pounds to 23.7 billion pounds in the current financial year-to-date (April to July 2016), compared with the same period in 2015.
  • The goods trade deficit increased to 12.4 billion pounds from 11.5 billion pounds in May.
  • Industrial output rose 0.1% month-on-month in June after a 0.6% drop in May.
  • Consumer prices rose 0.6% in the year to July compared with a 0.5% rise in the year to June.
  • Retail sales increased 1.4% in July after a 0.9% drop in June.
  • The jobless benefit claimants fell by 8,600 in July against an increase of 900 in June.
  • The ILO unemployment rate came in at 4.9% in the second quarter, the same rate as seen in three months to May.

China's GDP growth to fall below 6% by 2020

China's economic growth is expected to fall below 6% by 2020, according to the forecast by the International Monetary Fund (IMF). The economic think-tank predicted the country's GDP growth would gradually slowdown in the coming years to around 5.8% in 2021 due to slower private investment and weak external demand. The IMF said China's policymakers should shift away from their economic growth targets for it to improve the quality of its stimulus.

Key Economic Indicators

  • The trade balance for July came in at a surplus of $52.31 billion compared to a surplus of $48.11 billion in June.
  • Industrial production rose 6.0% in July from a year earlier compared with 6.2% in June.
  • The fixed asset investment in non-rural areas climbed 8.1% y-o-y in the January-July period compared with an increase of 9.0% for the first six months of the year.
  • Chinese banks extended 463.6 billion yuan in new loans in July, significantly lower than 1.38 trillion yuan extended in June.
  • The official manufacturing PMI rose to 50.4 in August compared with 49.9 in July, while non-manufacturing PMI edged down to 53.5 in August from 53.9 in July.
  • Annual inflation grew 1.8% y-o-y in July, down from June's 1.9%.
  • Retail sales grew 10.2% in July from a year earlier, slowing from a 10.6% increase in June.

Japanese economy expands at lower rate in Q2 2016

Japan's economy grew at a 0.7% annualized rate over April-June, an upward revision of the preliminary reading of 0.2% growth, and compared to 2% growth in Q1. The country's cabinet approved a 28 trillion yen stimulus package to boost the country's sluggish economy. Bank of Japan Governor Haruhiko Kuroda said that the central bank will take additional monetary easing measures without hesitation to achieve its inflation target. Haruhiko Kuroda said Saturday that the central bank will take additional monetary easing measures "without hesitation" to achieve its inflation target.

Key economic indicators

  • Japan reported a trade surplus of 513.5 billion yen in July compared with a surplus of 692.8 billion yen posted in June. Exports plunged 14% on year in July compared with a fall of 7.4% in June, while imports declined 24.7% on year compared with a fall of 18.8% in June.
  • The current account surplus stood at 974.4 billion yen in June, hitting its lowest level since January, following a current account surplus of 1809.1 billion yen in the previous month.
  • The unemployment rate came in at 3% in July, unchanged from the previous month.
  • Retail sales fell at an annualised 0.2% in July, following a 1.3% decline in June.
  • Industrial production was flat in July, following a 2.3% increase in June.
  • Core CPI fell 0.5% in July from a year earlier compared with a 0.4% drop in June.

Singapore lowers 2016 growth forecast

The Singapore government lowered economic growth forecast for 2016 to 1-2% from 1-3% in the wake of dim global economic outlook and Brexit concerns. The country's GDP grew 2.1% y-o-y in Q2 2016, unchanged from Q1. Among key indicators, a) industrial production fell 3.6% y-o-y in July, following 0.6% growth in the preceding month, b) exports fell 10.6% in July after a 2.4% drop in June and c) annual inflation fell 0.7% in July, following same reading in June.

Domestic Fixed Income Review

Domestic G-sec Yield

6 Month LIBOR

The interbank call money rate hovered near the repo rate of 6.50% for most of the month, mainly due to comfortable liquidity conditions in the system and periodic fund infusion by the RBI through repo auctions. However, some pressure was seen on the call rates after the RBI conducted reverse repo auctions at regular intervals to drain away excess funds. Outflows towards purchase of state development bonds also led to marginal tightness in the rates.

Government security prices (gilts) ended higher in the month with the yield on the 10-year benchmark - the 7.59%, 2026 paper - falling to 7.11% on August 31, 2016 compared with 7.16% on July 29, 2016. Bond prices rose sharply in the first half of the month taking positive cues from the RBI's monetary policy announcement. The market cheered the central bank's decision to hold open market bond purchase auctions during the month. The banking regulator added that it would front-load liquidity infusions to ensure smooth redemption of foreign currency deposits. Other factors that boosted bond prices were a) sporadic declines in crude oil prices and US benchmark treasury yields, b) expectations of increased foreign portfolio investor inflows into local debt markets following the Bank of England's interest rate cut and c) hopes of a new 10-year bond issuance.

However, gains were trimmed as sentiments were dented further following the appointment of Urjit Patel as the successor to Raghuram Rajan. Patel is perceived to hold a hawkish view on inflation, and this diminished hopes of an interest rate cut by the RBI in the near future. The rupee's weakness against the dollar and the release of latest domestic consumer inflation figures also affected prices. Uncertainty about the US Federal Reserve raising interest rates in the near future also weighed on gilts.

Among major developments, the Ministry of Finance said that state governments will now be allowed to prepare their borrowing calendar for the first nine months and seek a one-time consent for raising open market borrowings (OMB) during the first nine months of the financial year. The government said that certain provisions under the Companies Law will not be applicable on rupee-denominated bonds that are issued to persons residing outside India. An expert panel suggested easing of norms for foreign investors, and a corporate bond index along lines of Sensex or Nifty, in a bid to develop India's corporate bond market. The RBI allowed banks to raise capital through 'masala' bonds in the overseas market, and said it would seek legal amendments to allow banks to borrow from the central bank pledging corporate bonds, or corporate bond repo. The Securities Exchange Board of India (SEBI) fixed Rs 2.44 lakh crore as the combined debt limit for all foreign investments in rupee denominated bonds for foreign portfolio investors (FPIs). Asia Index launched a new index to measure the performance of Collateralised Borrowing and Lending Obligation (CBLO) rate. National Securities Depository Ltd (NSDL) launched a facility for individual account holders to trade in government securities.

 

Fixed Income Indicators

Rates & Liquidity

  31-Aug-16 1 Week Ago 1 Month Ago
Repo 6.50 6.50 6.50
Reverse Repo 6.00 6.00 6.00
CRR 4.00 4.00 4.00
LAF o/s Repo (Rscr) 3207 12349 3495
LAF o/s Rev Repo (Rscr) 6328 2476 3004
 

Overnight                                         Rate(%)

  31-Aug-16 1 Week Ago 1 Month Ago
Mibor 6.54 6.50 6.59
Call 6.50 6.50 6.55
CBLO 6.35 6.49 6.28
OIS 1Y 6.56 6.57 6.50
OIS 5Y 6.49 6.50 6.49
     

CDs                                                             Yield(%)

  31-Aug-16 1 Week Ago 1 Month Ago
1-Month 6.50 6.55 6.52
3-Month 6.60 6.61 6.60
6-Month 6.88 6.87 6.87
1-Year 7.20 7.18 7.21
 

CPs                                                   Yield(%)

  31-Aug-16 1 Week Ago 1 Month Ago
1-Month 6.70 6.90 6.85
3-Month 6.95 7.00 7.21
6-Month 7.60 7.63 7.80
1-Year 7.90 7.90 8.10
     

Short Term Bonds                                        Yield(%)

  31-Aug-16 1 Week Ago 1 Month Ago
1 Y G-Sec 6.79 6.83 6.84
1 Y AAA 7.33 7.35 7.28
1 Y AA 7.85 7.87 7.80
2 Y G-Sec 6.84 6.85 6.85
2 Y AAA 7.40 7.45 7.40
2 Y AA 7.87 7.92 7.87
 

Long Term Bonds                          Yield(%)

  31-Aug-16 1 Week Ago 1 Month Ago
5 Y G-Sec 7.02 7.05 7.04
5 Y AAA 7.51 7.59 7.58
5 Y AA 8.16 8.24 8.23
10 Y G-Sec 7.11 7.13 7.16
10 Y AAA 7.63 7.73 7.82
10 Y AA 8.45 8.55 8.64
     

Top 5 Graded G Secs                                   Yield(%)

  31-Aug-16 Previous Close 1 Month Ago
07.59 GS 2026 7.11 7.11 7.16
07.59 GS 2029 7.13 7.13 7.26
07.61 GS 2030 7.08 7.07 7.22
07.88 GS 2030 7.13 7.13 7.26
08.27 GS 2020 6.95 6.96 6.99
 

Currency

  31-Aug-16 1 Week Ago 1 Month Ago
USD/INR 66.96 67.11 67.02
EURO/INR 74.62 75.81 74.27
GBP/INR 87.69 88.39 88.30
100 JPY/INR 64.89 66.90 64.69
USD/EURO 0.90 0.89 0.91
 

 

10 Year G-sec movement

 

Corporate Bond Yield

 

Corporate AAA, AA Bond Spreads

 

Economic Events Calendar

September 12, 2016
  • China Industrial Production, August
  • China Retail Sales, August
  September 26, 2016
  • US New Home Sales, August
  • US Dallas Fed Manufacturing Survey, September
  • Bank of Japan Meeting Minutes
September 13, 2016
  • US Treasury Budget, August
  • UK Consumer Price Index, August
  • UK Producer Price Index, August
  • India's Consumer Price Index Combined Inflation, August
  September 27, 2016
  • US Flash Services PMI, September
  • US Consumer Confidence, September
  • US S&P Case-Shiller HPI, July
September 14, 2016
  • US Import and Export Prices, August
  • Eurozone Industrial Production, July
  • UK Labour Market Report, August
  • India's Wholesale Price Index Inflation, August
  September 28, 2016
  • US Durable goods orders, August
September 15, 2016
  • US Producer Price Index, August
  • US Retail Sales, August
  • US Philadelphia Fed Business Outlook Survey, September
  • US Empire State Manufacturing Survey, September
  • US Industrial Production, August
  • US Business Inventories, July
  • Eurozone Merchandise trade balance, July
  • Bank of England Monetary Policy Review
  • UK Retail Sales, August
  September 29, 2016
  • US GDP, Q2
  • US International Trade, July
  • US Jobless Claims
  • US Pending Home Sales, August
  • US Farm Prices, September
  • Eurozone Economic Sentiment, September
  • Japan consumer price index, August
  • Japan Unemployment Rate, August
September 16, 2016
  • US Consumer Price Index, August
  • US University of Michigan Consumer Sentiment Index, September
  September 30, 2016
  • US Personal Income and Outlays, August
  • US Chicago PMI, September
  • US University of Michigan Consumer Sentiment Index, September
  • Eurozone Unemployment Rate, August
  • UK GDP, Q2 Final
  • China Manufacturing PMI, September
  • India's Government finances, April-August
  • India's Core sector growth, August
  • India's CPI for rural and farm labourers, August
September 19, 2016
  • US Housing Market Index, September
  October 3, 2016
  • US Motor Vehicle Sales, September
  • US Purchasing Managers' Manufacturing Index, September
  • US ISM manufacturing index, September
  • Eurozone Manufacturing PMI, September
  • UK CIPS/PMI Manufacturing Index, September
  • India Nikkei Manufacturing PMI, September
September 20, 2016
  • US Housing Starts, August
  • Bank of Japan Announcement
  • Japan Merchandise trade balance, August
  • India's CPI for rural and farm labourers. August
  October 4, 2016
  • Eurozone producer price index, August
  • Japan Composite PMI, September
  • China Caixin Services PMI, September
  • India's RBI Fourth Bi-Monthly Monetary Policy Review
September 21, 2016
  • US FOMC Meetings Announcement and Forecasts
  October 5, 2016
  • US ADP Employment Report, September
  • US International Trade, August
  • US ISM Non-Manufacturing Index, September
  • US Services Purchasing Managers' Index, September
  • US Factory Orders, August
  • Eurozone Composite PMI, September
  • Eurozone Retail Sales, August
  • UK CIPS/PMI Services Index, September
  • India Services PMI, September
September 22, 2016
  • US Existing Home Sales, August
  • US Leading Indicators, August
  • US Chicago Fed National Activity Index, August
  • Eurozone Flash Consumer Confidence, September
  • Japan's Flash Manufacturing PMI, September
  October 7, 2016
  • US Employment Situation, September
  • US Wholesale Trade, August
  • US Consumer Credit, August
  • UK Industrial Production, August
  • European Central Bank Meeting Minutes, September
September 23, 2016
  • US Flash Manufacturing PMI, September
  • Eurozone Composite PMI, September
  • Japan All Industry Index, July
  October 10, 2016
  • US Labour Market Condition, September

US Fixed Income Markets - Overview

US treasuries fell in August, with the yield of the 10 year bond hardening to 1.57% on August 31 compared to 1.46% on July 29. Bond prices fell tracking intermittent gains in the domestic equity market and as encouraging economic indicators in the housing and labor markets increased the odds of a Fed interest rate hike. Safe-haven appeal was dented further as several Fed officials, including Chairperson Janet Yellen, expressed upbeat views about the economy. Bonds received some support after the Bank of England cut interest rates for the first time since 2009 and expanded its quantitative easing program.

US 10 Year Govt. Bond Yield

 

Learning Centre - Bond Portfolio Strategies

Reinvestment, liquidity, and interest rate risk are uncertainties associated with bond investment. To manage these risks, bond fund managers actively buy and sell the papers in their portfolios. Depending on the maturities of the bonds in the portfolio, three popular strategies used are laddering, bullet and barbell. These strategies are so called because of the appearance of their dot plots.

Creating a "laddered" portfolio involves buying bonds of different maturities, for example: three, five and ten years. This results in redemption of bonds at different periods, and serves as a future source of liquidity. The proceeds can be reinvested by the manager in longer term papers. This keeps reinvestment risk and interest rate risk under control as only a portion of the invested papers is redeemed at a time. It also prevents all the funds being 'locked-in'.

The barbell strategy involves investing in only short term and long term papers. Bond managers benefit from the attractive coupons offered by longer term papers. The bonds maturing over the near term can be reinvested or mobilized into other investment avenues.

In the bullet strategy, the manager staggers the purchases of papers such that they all mature on a particular date. This strategy is used to meet an expected future financial obligation. A risk associated with this strategy is that the market interest rate may fall over the period in which the purchases are made.

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