June 2014 | srei
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June 2014

June, 2014

Indian Economy Review

Major global institutions cautiously optimistic about the Indian economy amid macroeconomic concerns

The International Monetary Fund (IMF) expects the Indian economy to recover to a potential growth of 6.75-7% in the coming years. A senior IMF official has suggested that India should continue to gradually bring down the fiscal deficit and usher in fuel subsidy reforms to bolster economic growth. The World Bank has cut its estimate for India’s economic growth this fiscal to 5.5% from 5.7% projected earlier, but expects the country to grow 6.3% in 2015-16 and 6.6% in 2016-17. Back home, the RBI’s financial stability report states that India’s economic growth, inflation and banks’ asset quality remain concerns.

Domestic GDP Growth

Government takes decisions to boost the economy

In its bid to stimulate flagging growth in the country, the central government has initiated decisions to boost the economy. It has decided to review the progress of all projects worth Rs 6.5 lakh cr cleared by the previous government's Cabinet Committee on Investments. It cleared seven big-ticket investment projects worth Rs 21,000 cr. The Ministry of Road Transport and Highways cleared road projects worth Rs 40,000 cr. It also plans to set up a finance corporation with a corpus of Rs 1 lakh cr, in partnership with Japan, to fund projects in the road sector. The government has announced a host of measures to address the slump in investment in power projects. Further, India has inked pacts with China to build industrial parks and attract Chinese investment, share flood data of the Brahmaputra river and establish a framework for regular interactions between the two nations’ administrative officials.

Inflation numbers give mixed signals about the price situation

India’s retail inflation measured by the Consumer Price Index (CPI) eased to 8.28% in May due to a fall in the prices of vegetables, cereals and dairy products; CPI inflation was 8.59% last month. However, Wholesale Price Index (WPI)-based inflation rose to a five-month high of 6.01% in May against 5.20% in the previous month, driven by costlier protein-based items, fuel and some manufactured products. To resolve the issue of inflation, Finance Minister Arun Jaitley reiterated the government’s commitment to easing bottlenecks that have caused inflation to spike; blamed energy costs and "speculative hoarding" for a rise in wholesale prices. The government has imposed a minimum export price of $300 per tonne on onions to curb their exports and help cool spiraling domestic prices. It has imposed a minimum export price (MEP) of $450 per tonne on potatoes to augment domestic supply of the vegetable. Meanwhile, CRISIL Research said that the overhaul of the entire system through which food travels from "farm to fork" is critical to root out systemic inefficiencies and bring down food inflation in India.

The new government begins work on PSU divestment

The Ministry of Finance has invited proposals from merchant bankers and chartered accountant firms to determine the fair value of the government's stake in Bharat Aluminum Company (Balco). The government plans to kick off its disinvestment drive with the dilution of a 5% stake in SAIL. It also asked banks and cash-rich PSUs to float a `reconstruction fund' to buy stakes in stressed power projects in the country.

Other major developments in the month

  • Finance Minister Arun Jaitley will present the Union Budget on July 10; the Railway Budget will be presented on July 8.
  • To help the Railways to reduce burgeoning loses, the government has hiked railway passenger fare by 14.2% in all classes and freight charge by 6.5% with effect from June 25.
  • The Cabinet has deferred the revision of gas prices by three months until September-end saying the new government needs to comprehensively review the complex issue and take a decision in public interest.
  • The government has accepted the report of a committee on rationalising definitions of FDI and FII; foreign investment of 10% or more in a listed company will now be treated as FDI.
  • The government has extended the excise duty concession for the automobile and consumer durables sectors by six months to December 31. It also plans to bring back excise duty in the branded garments category in the coming budget.
  • The government has allowed infrastructure finance companies to issue secured debentures with tenure of up to 30 years.
  • The Ministry of Corporate Affairs said that foreign companies will not have to mandatorily register their Indian subsidiaries as a public company.
  • The government has provided corporates time until March 2015 to set up audit, nomination and remuneration committees as mandated under the new companies law.
  • It said that industrial licence will not be needed to manufacture items for defence purposes other than those mentioned in a specific negative list.
  • The Ministry of Commerce has initiated a new trend of implementing anti-subsidy countervailing measures in the form of anti-subsidy countervailing duty.
  • The Ministry of Agriculture plans to set aside 10% under every scheme as a contingency fund to meet sudden expenditure if there is less rainfall in the country.
  • The Central Board of Direct Taxes (CBDT) has raised the cost inflation index for FY15 by 9.05%; in the previous fiscal, the cost inflation index increased 10.2%.

Major regulatory developments in the month

  • The RBI has tightened anti-money laundering norms by asking companies to appoint a designated director who can impose fines of up to Rs 1 lakh for violation of the law.
  • The RBI kept the lending rate ceiling for micro finance companies unchanged at 27.75% for the July to September quarter.
  • The SEBI has decided to conduct a nationwide survey to take stock of the savings and investment trends among the Indian households and find out the impact and changing dynamics of the securities market.
  • It also set up an ‘International Affairs’ team in a bid to strengthen international cooperation with global peers.
  • The National Pharmaceutical Pricing Authority has asked drug makers to provide details related to cost and annual turnover of 106 essential medicines.

Among key economic indicators released in the month,

India’s Index of Industrial Production rose to 3.4% in April due to improved performance of manufacturing, mining and power sectors, and higher output of capital goods after contracting 0.5% in March. The country’s annual infrastructure sector output growth slowed to 2.3% in May from 4.2% in the previous month, weighed down by declines in the production of crude oil, natural gas, petroleum and steel. India's trade deficit rose to a 10-month high of $11.23 bn in May compared with $10.09 bn in April; the trade deficit a year ago was $19.37 bn. Exports in May rose to $28 bn while imports dipped to $39.23 bn. Fiscal deficit in the first two months of the financial year touched Rs 2.41 lakh cr, or 45.6% of the full-year target. According to the RBI data, India attracted $37.8 bn foreign investment between January and March. India's total external debt stood at $440.6 bn at the end of March, up 7.6% from the end of March 2013. India's HSBC manufacturing Purchasing Managers' Index rose to a three-month high of 51.4 in May from 51.3 in April, while Services Purchasing Managers' Index (PMI) rose to 50.2 points in May from 48.5 in April.

Indicators Current Previous
Monthly WPI Inflation 6.01% (May 2014) 5.20% (April 2014)
Industrial Growth 3.4% (April 2014) -0.5% (March 2014)
Exports $53.63bn (April-May 2014) $49.26bn (April-May 2013)
Imports $74.95bn (April-May 2014) $86.31bn (April-May 2013)
Trade Deficit -$21.32bn (April-May 2014) -$37.05bn (April-May 2013)
Gross Tax Collections Rs 84,516cr (April-May 2014) Rs 77,767cr (April-May 2013)

IIP Growth

IIP Growth

  • India’s Index of Industrial Production rose to 3.4% in April due to improved performance of manufacturing, mining and power sectors, and higher output of capital goods after contracting 0.5% in March.

IIP-Core Sector Growth

Core IIP Growth

  • The country’s annual infrastructure sector output growth slowed to 2.3% in May from 4.2% in the previous month, weighed down by declines in the production of crude oil, natural gas, petroleum and steel.

Fiscal Deficit

Fiscal Deficit

  • Fiscal deficit in the first two months of the financial year touched Rs 2.41 lakh cr, or 45.6% of the full-year target.

Global Economy Review

World Bank lowers global economic outlook

The World Bank has forecast a gloomy outlook for the global economy for 2014 due to downbeat events in the first quarter of the year – a cold winter in the US and the Russian-Ukraine crisis. It has lowered the 2014 global growth forecast to 2.8% from 3.2%.

Bad weather takes a toll on the US economy

The US economy saw the steepest decline in growth - by 2.9% (annual) - in five years in Q1 2014 compared with the earlier estimate of -1% and 2.6% growth in Q4 2013 due to an unusually cold winter and curb in consumer spending. The weak start to the year also resulted in cut in growth outlook for 2014. The International Monetary Fund (IMF) lowered its growth outlook for 2014 to 2% from 2.8% predicted earlier and the World Bank trimmed its 2014 growth outlook to 2.1% from 2.8%. The US Federal Reserve (Fed) cut its 2014 growth forecast to 2.1-2.3% from 2.9% but expressed confidence that recovery was largely on track and would allow it to begin raising interest rates in 2015. The Fed continued with the reduction in its monthly asset purchases, paring it from $45 bn to $35 bn a month.

World GDP Growth

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Major Global Central Bank
US GDP -2.9% Q1 2014 2.6% Q4 2013 US Fed Funds Rate 0-0.25%
US unemployment 6.1% June 2014 6.3% May 2014 Bank of England 0.50%
UK GDP 0.8% Q1 2014 0.7% Q4 2013 European Central Bank 0.15%
Euro Zone GDP 0.2% Q1 2014 0.2% Q4 2013 Japan Benchmark Rate 0-0.10%
Japan GDP 6.7% Q1 2014 0.3% Q4 2013    
China GDP 7.4% Q1 2014 7.7% Q4 2013    
Singapore’s GDP 4.9% Q1 2014 5.5% Q4 2013    

Key US economic indicators

  • The current account deficit widened to $111.16 bn in Q1 2014 from $87.32 bn in Q4 2013 and $105.49 bn in the same quarter a year ago.
  • Industrial production rose 0.6% in May after a 0.3% drop in April; capacity utilisation ticked up 0.2% to 79.1% in May.
  • Consumer prices rose 0.4% in May (the fastest increase since February 2013) after rising 0.3% in April.
  • Retail sales rose 0.3% in May after an upwardly revised 0.5% rise in April.
  • Personal income rose 0.4% in May after gaining 0.3% in April, while personal spending rose 0.2% last month compared with a flat reading in April.
  • Non-farm payrolls rose by 288,000 in June following an upwardly revised 224,000 in May; the unemployment rate slipped to a five-and-a-half year low of 6.1% in June from 6.3% in May.
  • New home sales jumped 18.6% in May (the highest level in six years) following a 3.7% increase in April while existing home sales increased 4.9% to an annual rate of 4.89 mn units in May (the largest monthly increase since August 2011) compared with April's revised 4.66 mn units.


Eurozone cuts interest rates to tackle deflation

In a historic move to fight deflation and spur lending in the economy, the European Central Bank (ECB) lowered its benchmark interest rate to 0.15% from 0.25%. It trimmed its marginal lending facility to 0.40% from 0.75% and deposit rate to -0.1% from zero. It also announced a 400 bn euro package of cheap funding for banks. Meanwhile, the Eurozone confirmed GDP growth of 0.2% in Q1 2014 against 0.3% growth recorded in Q4 2013. The World Bank expects the Eurozone to grow 1.1% in 2014 after shrinking in 2012 and 2013.

Key Eurozone economic indicators:

  • Industrial production increased 1.4% on an annualised basis in April after growing by an upwardly revised 0.2% in March.
  • Trade balance in April was a surplus of 15.7 bn euros compared with a surplus of 16.7 bn euros in March.
  • Employment increased by a seasonally-adjusted rate of 0.1% in Q1 2014, the same growth rate as the previous quarter (Q4 2013).
  • The flash estimate of annual inflation came in at 0.5% in June, same as the level of inflation in May.

The UK posts 3% annual growth in Q1 2014

The UK’s annual GDP growth rate in Q1 2014 was revised down to 3% according to the final estimate from 3.1% estimated earlier. On a quarterly basis, it rose 0.8% in Q1 2014 as compared with 0.7% Q4 2013. The National Institute of Economic and Social Research (NIESR) said that the UK’s GDP grew 0.9% in the three months ended May after 1.1% growth in the three months ended April. The IMF has warned the UK government that accelerating house prices and low productivity pose the greatest threat to its economic recovery. Meanwhile, the Bank of England has decided to maintain the bank rate at 0.5% and asset purchases at 375 bn pounds at its latest monetary policy meeting.

Key UK economic indicators:

  • Public sector net borrowing was up to 13.3 bn pounds in May from 12.6 bn pounds in the same month last year.
  • Industrial output gained 0.4% in April after growing by a revised 0.1% in March.
  • The unemployment rate fell to 6.6% in the three months to April from 6.8% in the previous three months.
  • The number of people employed in the UK rose by 345,000 to 30.5 mn in the three months to April (the largest number since records began in 1971) and 780,000 more than a year earlier.
  • Retail sales dropped 0.5% in May vs a downwardly revised gain of 1% in April.
  • Consumer Price Index grew 1.5% in the year to May, down from 1.8% in April.


China’s economic growth on a slippery path

The World Bank said the Chinese economy is expected to record slower growth over the medium term but the country has the ability to roll out economic support measures to meet its official target of about 7.5% this year. The IMF has cut its economic growth forecast for 2015 to 7% from 7.3% and has urged authorities to avoid further stimulus measures and concentrate on curtailing financial risks instead.

Key Chinese economic indicators

  • Exports rose 7% in May from a year earlier compared with a 0.9% rise April, while imports fell 1.6% as against a 0.8% rise in April. The trade surplus widened to $35.9 bn in May from $18.5 bn in April.
  • The economy added 4.73 mn jobs in the first four months of 2014, which was higher by 30,000 from the same period of last year.
  • Industrial production rose 8.8% in May from 8.7% in April.
  • China's official manufacturing Purchasing Managers Index (PMI) rose to 50.8 in May from 50.4 in April.
  • Retail sales rose 12.5% on year in May from 11.9% in the preceding month.
  • Consumer Price Index rose 2.5% year-on-year in May compared with a 1.8% rise in April.

Japan unveils new growth measures; economy grows 6.7% (annual) in Q1 2014

Japanese Prime Minister Shinzo Abe announced a fresh package of economic reforms aimed at revitalising corporate earnings power including lowering the corporation tax. The country continued on its steadfast growth path with the economy growing at an annualised 6.7% in Q1 2014, up from the initial estimate of 5.9%.

Key Japanese economic indicators:

  • The current account surplus was 187.4 bn yen in April against the prior month's surplus of 116.4 bn yen.
  • Industrial production rose a seasonally adjusted 0.5% in May following a 2.8% drop in April.
  • Retail sales fell 0.4% year-on-year in May compared with a 4.3% decline in April.
  • Consumer Price Index rose 3.4% in May from a year earlier compared with a 3.2% rise in April.
  • The trade deficit in May narrowed 8.3% from a year ago to 909 bn yen; imports were down 3.6% to 6.5 trillion yen, while exports fell 2.7% to 5.6 trillion yen.

Singapore economy to grow 3.8% in 2014

The Monetary Authority of Singapore (MAS) said that Singapore’s economy is expected to grow 3.8% in 2014. Among key indicators, the country’s non-oil domestic exports (NODX) contracted 6.6% year-on-year in May vs a 0.9% year-on-year increase in April. The manufacturing PMI fell to 50.8 in May from 51.1 in the preceding month.

Domestic Fixed Income Review

Domestic G-sec Yield

6-month LIBOR

Interbank call money rates moved in a broad range of 7.00-8.80% in June; they were on the higher side for most parts of the month. Demand for funds from banks to meet their daily and weekend reserve needs, to make short-term loans and spruce up their balance sheets towards the quarter-end pulled up the call rates. Outflow of funds on account of excise, sales and corporate advance tax payments by corporates also put pressure on the call rates. Some easing in the rates was seen on tracking an intermittent fall in CBLO rates, and as the liquidity condition improved after the Reserve Bank of India (RBI) conducted two term repo auctions for notified amounts of Rs 10,000 each on June 18 and June 20.

Indian government bond prices (gilts) declined in the month, with the yield on the 10-year benchmark paper 8.83%, 2023 rising to 8.74% on June 30 from 8.64% on May 30, 2014. Gilts were primarily hit by a rise in crude oil prices due to the ongoing crisis in Iraq, which triggered concerns that inflation may rise further in India as the country is a major importer of crude oil. Rise in domestic wholesale inflation to a five-month high of 6.01% in May from 5.20% in April, dashing hopes of an interest rate cut by the RBI in coming months, dealt another blow to sentiments. Gilt prices slipped further as foreign institutional investors (FIIs) were forced to stop their bond purchases in the earlier part of the month after they crossed the gilt investment limit of 90%. Hopes that the government may raise FII debt limits were dashed after Finance Secretary Arvind Mayaram and RBI Deputy Governor H R Khan clarified that no discussions for the same had taken place. The safe haven asset was affected further on reports that the RBI was considering the issue of a new 10-year bond as the current benchmark's outstanding figure has reached Rs 69,000 cr, and on the government’s decision to extend excise duty cuts for six months until December 31. A partial devolvement of the 8.27% 2020 gilt during the RBI's weekly auction in the last week of the month also affected sentiments for gilts.

The decline in gilts was arrested after the RBI, in its second bi-monthly policy review on June 3, left the repo rate unchanged at 8% and said a faster-than-anticipated disinflation could give it some headroom to ease the policy stance. The central bank also lowered SLR to 22.5% from 23% effective the fortnight beginning June 14. Gilt prices rose as market participants were bullish on expectations of purchases from FIIs. Positive CPI-based inflation data for May also cheered investors; data showed that retail inflation for May had eased to 8.28% from 8.59% in April. Sporadic value buying and appreciation in the rupee against the dollar and some weak economic data from the US also limited gilt losses.

Among major developments in the month,, RBI Governor Raghuram Rajan said that he is not in favour of taking regulation of bond markets away from the central bank as the move may hamper development of the market. The RBI allowed registered FIIs, QFIs deemed as registered FPI, long-term investors registered with SEBI - Sovereign Wealth Funds (SWFs), multilateral agencies, pension/ insurance/ endowment funds and foreign central banks to invest on a repatriation basis in non-convertible/redeemable preference shares or debentures issued by an Indian company. The central bank also decided to launch inflation indexed bonds with revised features to attract more retail investors. Further, the RBI has switched to using an electronic bond trading platform to manage cash levels in the debt market. The Securities and Exchange Board of India (SEBI) said that investments by foreign portfolio investors (FPIs) in non-convertible shares or debentures will be included within the $51 bn limit meant for corporate debts. The SEBI has set minimum subscription for public issue of debt securities at 75% of the base issue size for both NBFCs and non-NBFC issuers. It has also set minimum base issue size for the same at Rs 100 cr. The capital markets regulator has asked the government to do away with tax anomalies in corporate bonds to attract investors. Separately, SEBI data showed corporate bond issuances through private placement hit a five-year low of Rs 9,070 cr in May compared with Rs 33,759 cr in the same month a year ago. Meanwhile, IRDA allowed insurers to invest in interest rate derivatives for hedging against interest rate risks in their transactions. Separately, according to a CARE Ratings report, Indian retail asset securitisation market volumes decreased marginally by around 6% to Rs 28,300 cr in FY14 as against Rs 30,300 cr in FY13.

On the banking front, the RBI has permitted banks to treat loans as 'standard' even when the date of commencement of a project is delayed by two years, to provide easier fund access to infrastructure firms. The RBI also directed banks to give data about willful defaulters every month or more frequently to the credit information companies from the beginning of 2015. Further, the central bank moved to a time defined process by fixing schedules for various regulatory approvals, including granting of private bank licence, and also released a citizens' charter for its various services such as clearing of transactions. The RBI directed all banks and financial institutions to provide information and documents sought by the Special Investigation Team (SIT) set up to unearth black money. It told banks to maintain 60% liquidity coverage ratio from January 2015 and raise the level to 100% over the next four years. Further, it asked banks to disclose sector-wise advances in the ‘Notes to Accounts’ section of the financial statements from the financial year 2014-15 onwards. The RBI accepted the Nachiket Mor Committee’s recommendations on introducing payment banks – specialised banks to provide services to small businesses. The central bank eased address proof norms for opening a bank account; it said customers may submit only one documentary proof of address (either current or permanent) for this purpose. Under a new code, the RBI limited customers’ liability to Rs 10,000 in unauthorised internet banking transactions; the bank has to make good the rest of the amount. The RBI also said that interest on unclaimed deposits with banks will be payable only from the day they are transferred to a newly set-up fund for educating depositors. The RBI permitted banks to engage non-deposit taking non-banking finance companies (NBFC-ND) as business correspondents (BCs). It allowed non-resident investors to pledge shares in an Indian company in favour of NBFCs. The central bank also raised the cash reserve ratio (CRR) for non-scheduled urban co-operative banks (UCBs) by 100 bps to 4%. Further, it said that urban co-operative banks should create deferred tax liability on special reserves. The RBI also allowed urban co-operative banks to open a demat account for customers to provide online trading facility.


Fixed Income Indicators

Rates & Liquidity

  30-Jun-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) 21,349 18,348 6,159
LAF o/s Rev Repo (Rscr) 2,165 1,618 6,502

Overnight                                                   Rate(%)

  30-Jun-14 1 Week Ago 1 Month Ago
Mibor 9.02 8.20 7.92
Call 8.70 8.20 7.30
CBLO 9.08 7.97 7.58
OIS 1Y 8.37 8.40 8.38
OIS 5Y 7.90 8.04 8.10

CDs                                                                       Yield(%)

  30-Jun-14 1 Week Ago 1 Month Ago
1-Month 8.55 8.59 8.21
3-Month 8.50 8.53 8.52
6-Month 8.72 8.73 8.85
1-Year 8.91 8.94 9.00

CPs                                                   Yield(%)

  30-Jun-14 1 Week Ago 1 Month Ago
1-Month 8.70 8.74 8.39
3-Month 8.69 8.76 8.80
6-Month 9.05 9.06 9.22
1-Year 9.26 9.30 9.45

Short Term Bonds                                                       Yield(%)

  30-Jun-14 1 Week Ago 1 Month Ago
1 Y G-Sec 8.30 8.15 8.29
1 Y AAA 9.03 8.94 8.83
1 Y AA 9.54 9.45 9.34
2 Y G-Sec 8.32 8.30 8.42
2 Y AAA 9.11 9.12 9.00
2 Y AA 9.60 9.61 9.49

Long Term Bonds                                                   Yield(%)

  30-Jun-14 1 Week Ago 1 Month Ago
5 Y G-Sec 8.62 8.64 8.54
5 Y AAA 9.17 9.22 9.23
5 Y AA 9.82 9.87 9.88
10 Y G-Sec 8.74 8.77 8.64
10 Y AAA 9.14 9.13 9.28
10 Y AA 9.95 9.94 10.09

Top 5 Graded G-Secs                                         Yield(%)

  30-Jun-14 1 Week Ago 1 Month Ago
8.83% CGL 2023 8.74 8.75 8.64
08.28% CGL 2027 8.74 8.74 8.70
08.24% CGL 2027 8.81 8.81 8.79
08.12 GS 2020 8.65 8.68 8.61
08.35% CGL 2022 8.82 8.83 8.78


  30-Jun-14 1 Week Ago 1 Month Ago
USD/INR 60.17



EURO/INR 82.01 81.91 80.34
GBP/INR 102.33 102.56


100 JPY/INR 59.28 59.05 58.10
USD/EURO 0.73 0.74 0.73


10 Year G-sec Movement


Corporate Bond Yield


Corporate AAA, AA Bond Spreads

Economic Events Calendar

July 14, 2014
  • Euro zone Industrial Production, May
  • China’s GDP, Q2 2014
  • Bank of Japan Monetary Policy Review
  • India’s CPI for Combined, Rural, and Urban, June
July 29, 2014
  • US S&P Case-Shiller HPI, May
  • US Consumer Confidence, July
  • Japan’s Industrial Production, June
July 15, 2014
  • US Empire State Manufacturing (Mfg)Survey, July
  • US Retail Sales, June
  • US Import and Export Prices, June
  • US Business Inventories, May
  • UK Consumer Price Index, June
  • UK Producer Price Index, June
  • China’s Industrial Production, June
  • China’s Retail Sales, June
July 30, 2014
  • US GDP, Q2 2014 (Advance)
  • US FOMC Meeting Announcement
  • US ADP Employment Report, July
  • European Central Bank Lending Survey, Q2 2014
  • Euro zone Economic Sentiment, July
  • Japan’s PMI Manufacturing Index, July
July 16, 2014
  • US Beige Book, July
  • US Producer Price Index, June
  • US Industrial Production, June
  • US Housing Market Index, July
  • US Treasury International Capital, May
  • Euro zone Merchandise Trade, May
  • UK Labour Market Report, June
July 31, 2014
  • US Chicago PMI, July
  • US Employment Cost Index, Q2 2014
  • Euro zone harmonized index of consumer price index, July
  • Euro zone Unemployment Rate, June
  • China’s PMI Manufacturing Index, July
July 17, 2014
  • US Philadelphia Fed Survey, July
  • US / Building Permits / Housing Starts, June
  • Euro zone harmonized index of consumer prices, June
  • Bank of Japan Monetary Policy Minutes
August 1, 2014
  • US Employment Situation, July
  • US Personal Income and Outlays, June
  • US ISM Mfg Index, July
  • US PMI Manufacturing Index, July
  • US Motor Vehicle Sales, July
  • US University of Michigan Sentiment, July
  • US Construction Spending, June
  • Euro zone PMI Manufacturing Index, July
  • UK CIPS/PMI Manufacturing Index, July
July 18, 2014
  • US University of Michigan Sentiment, July
August 4, 2014
  • China’s PMI Composite, July
  • Japan’s PMI Composite, July
July 22, 2014
  • Euro zone Consumer Confidence Flash, July
  • Bank of England Monetary Policy Review meeting minutes
  • Japan’s PMI Mfg Index Flash, July
  • Japan’s Merchandise Trade, June
August 6, 2014
  • US International Trade, June
  • UK Industrial Production, June
July 24, 2014
  • US New Home Sales, June
  • US PMI Manufacturing Index Flash, July
  • Euro zone PMI Composite Flash, July
  • UK Retail Sales, June
  • China’s PMI Flash Mfg Index, July
  • Japan’s Consumer Price Index, June
August 7, 2014
  • European Central Bank Monetary Policy Review
  • Bank of England Monetary Policy Review
  • Bank of Japan Monetary Policy Review
July 25, 2014
  • US Durable Goods Orders, June
  • UK GDP, Q2 2014 (Preliminary)
August 8, 2014
  • US Wholesale Trade, June
  • US Productivity and Costs, Q2 2014
  • UK Merchandise Trade, June
  • China’s Consumer Price Index, July
  • China’s Producer Price Index, July
July 28, 2014
  • US Dallas Fed Mfg Survey, July
  • US Pending Home Sales Index, June
  • Japan’s Unemployment Rate, June

US Fixed Income Markets - Overview

US treasury prices ended marginally lower in June as fall witnessed at the start of the month was offset by rise later in the month led by defensive buying due to weak US domestic economic indicators and tension in Iraq. The yield on the 10 year benchmark bond rose to 2.52% on June 30 from 2.46% on May 30. Bonds started the month on a dim note due to upbeat US manufacturing and service data. But soon losses were recovered after the ECB cut interest rates to record lows. Escalating tension in Iraq and the World Bank lowering global economic outlook clubbed with weak domestic indicators (higher than expected contraction in Q1 2014 GDP, fall in retail sales and weak durable goods data) boosted the safe-haven appeal of the US debt. Despite such favourable cues, bonds ended the month down as rise in prices was restricted by positive US inflation and jobs data, sporadic fall in UK bond prices and upbeat economic cues from China and Japan.

US 10-Year Govt. Bond Yield

Learning Centre– Gilt Funds

Gilts funds are schemes offered by domestic mutual funds wherein they invest the pooled money exclusively in bonds/securities (gilts) issued by the Reserve Bank of India (RBI) on behalf of the government; hence their level of safety is similar to or higher than traditional debt instruments. Besides, they retain all the features of other mutual fund schemes; that is, professional management, diversification, liquidity, tax benefits, etc. As they offer the best of both worlds (the capital protection of traditional debt instruments along with the benefits of mutual funds), they are an attractive investment option. Gilt funds invest in government issued bonds, treasury bills, state-development loans and inflation indexed bonds.

Benefits of gilt funds

In addition to being credit-risk free, gilt funds benefit during falling interest rate scenarios. The value of underlying debt instruments in a fund’s portfolio fluctuates on a daily basis (known as market risk) due to factors like interest rate movement and the liquidity situation. The price of a debt instrument and interest rates (yields) move in opposite directions, i.e., prices of bonds rise when interest rates fall and vice versa.

The net asset value (NAV) of a debt fund scheme replicates the price of the underlying securities. Hence if interest rates fall, the NAV of debt funds rise. In a declining interest rate scenario, gilt funds and other long-term debt funds benefit more than short-term debt funds due to the longer maturity of the underlying securities held by the former.

Summing up

Gilt funds enable investors to park funds in credit-risk free government securities and earn higher returns when the interest rate declines. However, these funds are not completely risk free (as they are exposed to market risk) and are suitable for investors having long term investment horizon. Investors should evaluate their risk profile, investment objective and the ongoing interest rate scenario before investing in gilt funds.

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