October 2014 | srei
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October 2014

Indian Economy Review

Major global institutions foresee better growth prospects for the Indian economy

The recent reforms initiated by the government have prompted positive reactions from global institutions. The InternationaI Monetary Fund (IMF) has forecast 5.6% growth for India this year and 6.4% in 2015. The World Bank said that the Indian economy is set to grow 6.4% in 2015-16 and 7% in 2016-17 following 5.6% growth in 2014-15. The Organisation for Economic Cooperation and Development (OECD) said that India might see a pick-up in growth momentum, while most of the other major economies are anticipated to see stable prospects. Rating agency Moody's said that recent reform measures by the government coupled with those unveiled by the Reserve Bank of India (RBI) on the economic, fiscal and financial fronts are credit positive as they will accelerate growth if successfully implemented. RBI Governor Raghuram Rajan said that India’s economic recovery is uneven, but exudes optimism that the country will be in the 5% growth bracket during the course of this fiscal and accelerate further in the next financial year. Department of Industrial Policy and Promotion (DIPP) said that India will attract the highest-ever inflow of foreign direct investment (FDI) in the current fiscal on the back of a slew of policy reforms announced by the new government.

Domestic GDP Growth

Inflation declines to multi-year low in September

India’s retail inflation measured by the Consumer Price Index (CPI) eased to an all-time low of 6.46% in September, led by a fall in food prices, compared with 7.73% in August. Wholesale Price Index (WPI) inflation dipped to a five-year low of 2.38% vs 3.74% in August.

Government continues with its efforts to boost the economy

Adding to the recent series of reforms to prop up the economy, the government introduced a few more:

  • Labour reforms to boost the ease of doing business in India.
  • Universal Account Number for employees.
  • FDI policy in construction eased to attract money into the funds-starved sector.
  • Austerity measures to trim fiscal deficit including 10% cut in non-plan expenditure and ban on creation of new posts.
  • Defence projects worth Rs 80,000 cr cleared.
  • Twenty-five FDI proposals, envisaging a total investment of Rs 1,546 cr, cleared. A Rs 1,800 cr pharma proposal referred to the Cabinet for consideration.
  • A dedicated website launched for the government's financial inclusion scheme, Pradhan Mantri Jan Dhan Yojna (PMJDY), which will be linked with all social network websites.

The validity of industrial licences extended to as much as seven years from three to encourage domestic manufacturing.

Government prepares divestment plans for the current fiscal

The government plans to raise around Rs 5,000 cr this fiscal year by selling stakes in companies including ITC, Larsen & Toubro and Axis Bank. However, it may not dilute its stake in listed companies held through the Special Undertaking of the Unit Trust of India (SUUTI) in the current fiscal as it is confident of meeting its disinvestment target this year. Separately, the government clarified that neither would the disinvestment process deny it dividends from Central Public Sector Enterprises (CPSEs) nor would the proceeds go towards consumption expenditure.

Important developments

India and the US have decided to jointly develop a forum that will lay down a road map for easier inflow of FDI and foreign institutional investment (FII) into the nation. India and the UK launched a new financial partnership which will deepen financial cooperation between London and Mumbai. The Ministry of Commerce & Industry has set up a team called 'Japan Plus' to fast track investments from Japan; tax authorities of India and Japan are expected to ink a bilateral advance pricing agreement soon. India and Nepal have signed a power trade agreement that allows the exchange of electricity and opens up new areas of cooperation in the hydropower sector.

The government estimated that India requires $250 bn investment in the next 20 years in basic urban infrastructure. Finance Minister Arun Jaitley said the revised Constitution Amendment Bill to roll out Goods and Services Tax (GST) will be introduced in the winter session of the Parliament. The Department of Industrial Policy and Promotion (DIPP) has finalised the proposed foreign investment policy reforms related to composite limits as part of the efforts aimed at greater clarity and the plugging of loopholes. The government plans to give states an additional six months to implement the National Food Security Act. The Ministry of Finance (MoF) has estimated a far lower oil subsidy burden on account of falling crude prices for the year 2014-15 at around Rs 80,000 cr. It has asked public sector banks to tighten norms, including KYC monitoring for high-value fixed deposits. Further, it allowed companies to transfer manpower from existing units to Special Economic Zones (SEZs) without losing tax benefits. The government has notified rules for minimum 25% public shareholding in listed state-owned firms.

The government plans to transfer all existing environmental clearances of cancelled coal blocks to new owners once the auction is completed. It initiated coal reforms with an ordinance to facilitate e-auction of coal blocks for private companies; it also opened doors for commercial mining by private players in the future. The government has approved raising natural gas price to $5.61 per mmBtu from November 1 from $4.2 per mmBtu and has decided to deregulate diesel prices. It removed the price of LNG imports from the gas pricing formula to avoid conflict of interest where a company is an LNG importer as well as natural gas producer. The Ministry of Petroleum and Natural Gas abolished the system in which domestic suppliers would win contracts even if their bid was 10% higher than a foreign offer. It also constituted a panel to roll out the “Make in India” campaign in the oil and gas industry, and notified a 33% hike in natural gas prices. Meanwhile, the Telecom Commission deferred a proposal of imposing an annual licence fee of 8% on Internet service providers (ISPs) as this could lead to a hike in internet charges and impact the government’s Digital India project.

Major regulatory developments in the month

  • In a bid to rationalise expenses, SEBI has asked the MoF to deduct legal fees from penalties before remitting the amounts to the government.
  • The Competition Commission of India (CCI) gave its nod to the proposed joint venture between Singapore Airlines and Airbus Services Asia Pacific to provide flight pilot training services.
  • It also cleared L&T Technology Services' proposed asset purchase agreement with Dell International Services and JSW Steel's proposed over Rs 1,000 cr deal to acquire sponge iron maker Welspun Maxsteel.
  • Further, it cleared Adani Power's proposed deal to buy Lanco Infratech's 1200-MW imported coal-fired power plant at Udupi in Karnataka for more than Rs 6,000 cr.
  • Meanwhile, the CCI issued two separate orders against Coal India Limited and its subsidiaries for abusing their dominant position.
  • The Department of Telecommunications (DoT) has allotted a bulk of the 1800 MHz spectrum that Bharti Airtel, Vodafone, Idea Cellular, Reliance Jio Infocomm and Uninor had won in the February auctions.
  • Telecom Regulatory Authority of India (TRAI) has recommended a hike of around 10% in the price of 2G spectrum in the 1800 MHz band, in 20 circles, at Rs 2,138 cr per MHz, during the next round of auctions.
  • However, it said no auctions should be held in Maharashtra and West Bengal due to paucity of airwaves.
  • National Pharmaceutical Pricing Authority has imposed a Rs 300 cr penalty on Novartis for overcharging consumers on its painkiller medicine.
  • Meanwhile, Directorate General of Civil Aviation (DGCA) grounded three aircraft belonging to Air India, GoAir, and a non-scheduled operator (NSOP) for substantive safety lapses.
  • The Central Board of Direct Taxes has decided to grant automatic approval of long borrowings and bond issues including infra bonds for a concessional 5% tax on interest payments if they meet certain conditions.
  • The Supreme Court said all directors involved in the day-to-day running of a company can be made liable for a bounced cheque, but not one who resigned before the cheque was issued.
  • The Supreme Court has asked the Union government to release all the names of the people who have stashed money in accounts abroad.

Among key economic indicators released in the month,

India’s Index of Industrial Production (IIP) slowed to growth of 0.4% in August compared with a downwardly revised 0.41% growth in July. India’s core sector growth in September plummeted to 1.9%, the slowest pace in eight months, against 9% in the same month last year due to a fall in output of crude oil, natural gas, refinery products and fertilisers. India's trade deficit widened to $14.25 bn in September owing to a jump in oil and gold imports, and following a deficit of $10.84 bn in August. Exports rose 2.73% year-on-year to $28.9bn, while imports rose nearly 26% to $43.15 bn. India's fiscal deficit was Rs 4.39 lakh cr ($71.5 bn) during April-September, or 82.6% of the full-year target, compared to a deficit of 76% during the comparable period in the previous fiscal. India’s indirect tax collections were Rs 2.42 lakh cr in the first six months of the fiscal as against Rs 2.29 lakh cr in the corresponding period a year ago, while net direct tax collections rose to Rs 2.69 lakh cr from Rs 2.51 lakh cr during the same period. India’s services exports fell to $12.24 bn in August from $13.34 bn in July. FDI into India declined by about 10% in August this year to $1.27 bn, the lowest in the past eight months.

India’s HSBC manufacturing Purchasing Managers' Index (PMI) eased to a nine-month low of 51 in September from 52.4 in August while services PMI rose to 51.6 in September from 50.6 in August, reversing a slowdown seen in the previous two months.

Indicators Current Previous
Monthly WPI Inflation 2.38% (September 2014) 3.74% (August 2014)
Industrial Growth 0.40% (August 2014) 0.41% (July 2014)
Exports $163.70bn (April-September 2014) $153.75bn (April-September 2013)
Imports $237.10bn (April-September 2014) $230.48bn (April-September 2013)
Trade Deficit -$70.40bn (April-September 2014) -$76.72bn (April-September 2013)
Gross Tax Collections Rs 4,90,618cr (April-September 2014) Rs 4,58,172cr (April-September 2013)

IIP Growth

IIP Growth

  • India’s Index of Industrial Production (IIP) slowed to growth of 0.4% in August compared with a downwardly revised 0.41% growth in July.

IIP-Core Sector Growth 

Core IIP Growth

  • India’s core sector growth in September plummeted to 1.9%, the slowest pace in eight months, against 9% in the same month last year due to a fall in output of crude oil, natural gas, refinery products and fertilisers.

Fiscal Deficit

Fiscal Deficit

  • India's fiscal deficit was 4.39 trillion rupees ($71.5 bn) during April-September, or 82.6% of the full-year target, compared to a 76% deficit during the comparable period in the previous fiscal year.

 

Global Economy Review

Global economic outlook darkens

The outlook for global economic growth turned gloomy due to weak and uneven global economic recovery. The International Monetary Fund (IMF) has forecast world economic growth of 3.3% for 2014, down 0.1% from its July forecast, and 3.8% for 2015, down 0.2% from earlier expectations. The IMF has said that the Russia-Ukraine crisis and strife in the Middle East are weighing on the global economy, which also faces the risk of a wider economic threat if the Ebola outbreak in West Africa is not contained.

The US economy on strong foot; Fed ends quantitative easing stimulus programme

The US economic recovery continued to be on a firm path. The IMF sharply increased growth projection for the US to 2.2% from 1.7% forecast in July, citing strong employment growth, favourable financial conditions and improving housing market. The US Federal Reserve (Fed) has decided to end its quantitative easing stimulus programme and signaled confidence that the US economic recovery will remain on track. However, it said that interest rates will remain low for a considerable time. The US economy expanded at an annual rate of 3.5% in Q3 following 4.6% growth in Q2.

World GDP Growth

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Major Global Central Bank
US GDP 3.5% Q3 2014 4.6% Q2 2014 US Fed Funds Rate 0-0.25%
US unemployment 5.8% Oct 2014 5.9% Sep 2014 Bank of England 0.50%
UK GDP 0.7% Q3 2014 0.9% Q2 2014 European Central Bank 0.05%
Euro Zone GDP 0% Q2 2014 0.2% Q1 2014 Japan Benchmark Rate 0-0.10%
Japan GDP -7.1% Q2 2014 6.1% Q1 2014    
China GDP 7.3% Q3 2014 7.5% Q2 2014    
Singapore’s GDP 2.4% Q3 201 2.4% Q2 2014    

Key US economic indicators

  • The trade deficit narrowed to $40.1 bn in August from $40.32 bn in the preceding month.
  • Industrial production rose 1% in September after slipping 0.2% in August; the capacity utilisation rate rose to 79.3% in September from 78.7% in the preceding month.
  • Annual inflation edged up 0.1% in September after declining 0.2% in August.
  • Personal income rose a seasonally adjusted 0.2% in September from 0.3% in the preceding month.
  • Retail sales dropped 0.3% in September after a 0.6% gain in August.
  • US non-farm payrolls rose to a seasonally adjusted 214,000 in October from an revised 256,000 in the previous month; the unemployment rate fell to 5.8% in October, 0.1% lower than the previous month.
  • Housing indicators: New home sales rose 0.2% to 467,000 units in September compared with a revised annual rate of 466,000 units in August. Existing home sales rose 2.4% to an annual rate of 5.17 mn units, the strongest reading since September 2013 and compared to the August reading of 5.05 mn units.

EURO ZONE

Deflation weighs on the Eurozone economy

The Eurozone economic outlook weakened due to increasing threat of deflation. The IMF warned that the region faces a one-in-three chance of re-entering a recession soon. European Central Bank (ECB) Executive Board member Yves Mersch said that the region’s economy is still fragile and risks of additional economic setbacks remain. The ECB kept interest rates unchanged at 0.05% in October and outlined a programme to buy reparcelled debt known as asset-backed securities as well as covered bonds, secured on solid assets such as property. On the banking sector, ECB said that roughly one in five of the Eurozone's top lenders failed landmark health checks at the end of last year but most have, since then, repaired their finances. The central bank also identified a $32 bn shortfall for the region's lenders.

Key Eurozone economic indicators:

  • The current account surplus fell to a seasonally adjusted 18.9 bn euro in August from 21.6 bn euro in July.
  • The trade balance registered surplus of 9.2 bn euros in August versus surplus of 21.6 bn euros in July.
  • Industrial production fell by 1.8% in August against a 0.9% rise in July.
  • Retail sales rose to 1.2% in September from -0.4% in the preceding month.
  • Annual inflation edged up to 0.4% in October from 0.3% in September.
  • The unemployment rate was unchanged at 11.5% in September vis-à-vis August.

The UK to outshine rest of developed economies

The IMF expects the UK economy to grow at a faster rate than the rest of the G7 nations including the US, Germany and France in 2014. The IMF forecasted the UK’s GDP growth for 2014 at 3.2% but it warned that interest rates may have to rise quickly if inflation or the housing market runs out of control. In Q3 2014, the country’s GDP grew 0.7% compared with a 0.9% expansion in Q2. Meanwhile, the Bank of England voted to keep interest rates at 0.5% at its latest monetary meeting, with a majority of the Monetary Policy Committee citing insufficient evidence of inflationary pressure.

Key UK economic indicators:

  • The trade deficit in goods and services stood at 1.9 bn pounds in August compared with 3.1 bn pounds in July.
  • The public sector’s net borrowing was 11.8 bn pounds in September, up 1.6 bn pounds from the same month last year and compared to 11 bn pounds in August.
  • Industrial output was flat in August, after rising 0.4% in July.
  • Retail sales fell 0.3% month-on-month in September.
  • Annual inflation grew 1.2% in September, down from 1.5% in August.
  • The jobless rate fell to 6% during June-August, the lowest since late 2008 and dropped from 6.5% in the March-May period; the claimant count rate fell to 2.8% in September from 2.9% in August.

ASIA

China posts 7.3% growth in Q3 2014

In Asia, China's GDP expanded 7.3% on year in Q3 2014, the slowest pace in five years, following 7.5% growth in Q2. The World Bank said that China can afford to cut its 2015 economic growth target to 7% and still keep its labour market healthy. The IMF retained China’s growth projection for 2014 at 7.5% but lowered its 2015 growth forecast to 7% due to slow implementation of reforms and policies to limit local government debt and investment credits. In an important development, China approved construction of five airports and three railway projects worth $24.5 bn to speed up infrastructure projects and boost growth. China's central bank authorised the nation's interbank foreign exchange market to start direct trading between the Chinese yuan and the Singapore dollar.

Key Chinese economic indicators

  • China attracted $9 bn of FDI in September, up 1.9% from a year earlier.
  • Industrial production growth picked up to 8% year on year in September after a sharp slowdown to 6.9% in August.
  • The official non-manufacturing PMI edged down to 54 in September from 54.4 in August.
  • Retail sales fell to an annual rate of 11.6% in September from 11.9% in the preceding month.
  • The Consumer Price Index rose 1.6% in September from a year earlier compared with a 2% rise in August.

Japan announces fresh stimulus measures

In a move to boost sagging economic growth, Japan announced fresh round of stimulus measures. The Bank of Japan (BoJ) said it would increase its asset purchases by between 10 trillion yen and 20 trillion yen to about 80 trillion yen ($725 bn) annually. BoJ governor Haruhiko Kuroda said the increase was required to prevent a reversal into a "deflationary mindset" that the country's leaders contend has held back growth for many years. Earlier in the month, Japan downgraded its overall assessment of the economy for the second consecutive month in October, citing a slowdown in production.

Key Japanese economic indicators:

  • The merchandise trade deficit was 958.3 bn yen in September following the 949.7 bn yen deficit in August.
  • Industrial production fell 1.9% month-on-month in August compared with a 0.4% decline in July.
  • The Consumer Price Index rose 3% in September from a year earlier compared with a 3.1% rise in August.
  • Retail sales rose 2.3% in September from a year earlier following a 1.2% annual rise in August.
  • The unemployment rate came in at 3.6% in September, a tad up from 3.5% in August.

Singapore economy to grow at moderate pace in 2014

Singapore’s GDP growth was steady at 2.4% (annual) in Q3 2014 compared with similar growth in the previous quarter. Monetary Authority of Singapore said that the Republic’s economy is expected to grow at a moderate pace of between 2.5% and 3.5% this year. Among key economic indicators, retail sales rose 5.4% year-on-year in August following 5.5% growth in the preceding month. The non-oil domestic exports (NODX) rose 0.9% in September after a 6% jump in August.

Domestic Fixed Income Review

Domestic G-sec Yield

6 Month LIBOR

Interbank call money rates hovered mostly above the RBI’s repo rate of 8% in the month primarily due to higher credit disbursement and increase in currency in circulation in the festive season, and on account of assembly elections in Mumbai. Rates were also under pressure as banks borrowed to make indirect tax payments and to meet mandatory reserve requirements. The intermittent decline in the rates was, however, witnessed as liquidity in the banking system turned comfortable after the RBI conducted term repo auctions on a regular basis.

Indian government bond prices (gilts) ended higher in the month, with the yield of the 10-year 8.40% 2024 paper ending at 8.28% on October 31, 2014 compared with 8.51% on September 30. Sentiments were primarily boosted as global crude oil prices plummeted. Lower crude oil prices help reduce upside risks to inflation, given that India is a major importer of crude oil. Gilts strengthened further as easing of both consumer and wholesale inflation numbers in September led to hopes that the RBI may slash interest rates. Intermittent strength in the rupee against the dollar supported gilts. Government bond prices also advanced due to various government initiatives such as decisions to deregulate diesel prices, a move that is expected to improve the Centre’s fiscal condition, and allow FDI in the cash-strapped construction sector. Bonds also gained following the outcome of the state assembly elections in Maharashtra and Haryana, which enhances the government’s ability to push economic reforms.

Some gains were, however, capped after the RBI unexpectedly announced that it would sell government securities worth Rs 10,000 cr on October 13 under Open Market Operations (OMO). The increased supply in the market (in addition to the RBI’s scheduled weekly debt sale on October 10) dented sentiment as new gilts make debt held by current bond holders less valuable. Gilts also fell on profit taking ahead of some trading holidays and the outcome of the Federal Open Market Committee meeting. In the meeting held later in the month, the US Fed wound up its monthly bond purchases, but decided to persist with low interest rates. It also added that further improvement in US economic data could lead to an earlier-than-expected rate hike.

Among major developments in the month,, RBI Governor Raghuram Rajan said that the central bank may look at lifting the cap on foreign holding of government debt in two years once the economy has reached its potential growth rate. The RBI said banks can shift their excess bond holdings to trading portfolios from the held-to-maturity (HTM) basket thrice a year from 2015 to deepen the government securities market. The central bank ordered its supervision team to monitor the increased trades of companies in the debt market, concerned by the risks posed to financial market stability. SEBI clarified that long-term foreign portfolio investors (FPIs) such as sovereign wealth and foreign central banks can invest in government bonds having a minimum residual maturity of one year within the $5 bn category.

 

Among banking related developments, the RBI has asked banks to comply with the one-address-proof norm as it was found that many of them were not following the new rules. It has also asked banks to partially freeze and, subsequently, close accounts of customers who have not complied with KYC requirements despite repeated reminders. The central bank eased some rules for identifying defaulters and taking corrective action since banks found it impossible to comply with the strict norms. The RBI clarified that free transactions at non-home bank ATMs will come down to three from five only if all the transactions are carried out in the metros. It also hiked the limit for urban co-operative banks (UCBs) to sanction loan against gold collateral to Rs 2 lakh from Rs 1 lakh at present and permitted all UCBs to act as PAN service agents.

 

Fixed Income Indicators

Rates & Liquidity

  31-Oct-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) 9275 21209 8523
LAF o/s Rev Repo (Rscr) 6637 1493 27728
 

Overnight                                                   Rate(%)

  31-Oct-14 1 Week Ago 1 Month Ago
Mibor 7.39 8.95 8.19
Call 7.10 9.00 8.15
CBLO 6.93 8.66 7.66
OIS 1Y 8.10 8.03 8.46
OIS 5Y 7.52 7.50 7.89
     

CDs                                                                       Yield(%)

  31-Oct-14 1 Week Ago 1 Month Ago
1-Month 8.23 8.41 8.41
3-Month 8.47 8.57 8.51
6-Month 8.62 8.72 8.74
1-Year 8.75 8.84 9.01
 

CPs                                                   Yield(%)

  31-Oct-14 1 Week Ago 1 Month Ago
1-Month 8.42 8.51 8.60
3-Month 8.68 8.85 8.75
6-Month 9.09 9.21 9.09
1-Year 9.20 9.36 9.43
     

Short Term Bonds                                                       Yield(%)

  31-Oct-14 1 Week Ago 1 Month Ago
1 Y G-Sec 8.32 8.55 8.62
1 Y AAA 8.74 8.83 8.97
1 Y AA 9.26 9.35 9.49
2 Y G-Sec 8.21 8.28 8.37
2 Y AAA 8.69 8.75 9.04
2 Y AA 9.16 9.22 9.51
 

Long Term Bonds                                                   Yield(%)

  31-Oct-14 1 Week Ago 1 Month Ago
5 Y G-Sec 8.27 8.37 8.55
5 Y AAA 8.75 8.89 9.19
5 Y AA 9.40 9.54 9.84
10 Y G-Sec 8.28 8.36 8.51
10 Y AAA 8.80 8.97 9.16
10 Y AA 9.62 9.79 9.98
     

Top 5 Graded G-Secs                                         Yield(%)

  31-Oct-14 1 Week Ago 1 Month Ago
08.60% CGL 2028 8.37 8.38 8.66
08.40% CGL 2024 8.28 8.29 8.51
08.83% CGL 2023 8.41 8.43 8.72
08.27% CGL 2020 8.32 8.34 8.63
08.28% CGL 2027 8.40 8.43 8.76
 

Currency

  31-Oct-14 1 Week Ago 1 Month Ago
USD/INR 61.36

61.27

61.74
EURO/INR 77.19 77.97 78.21
GBP/INR 98.06 98.67 100.28
100 JPY/INR 55.28 57.27 56.36
USD/EURO 0.80 0.79 0.79
 

 

10-year G-sec Movement

 

Corporate Bond Yield

 

Corporate AAA, AA Bond Spreads

Economic Events Calendar

November 11, 2014
  • Japan’s Tertiary Index, September
November 26, 2014
  • US New Home Sales, October
  • US Pending Home Sales Index, October
  • US Durable Goods Orders, October
  • US Personal Income and Outlays, October
  • US Consumer Sentiment, November (Final)
  • UK GDP, Q3 2014 (Revised)
November 12, 2014
  • US Wholesale Trade, September
  • Euro zone Industrial Production, September
  • Bank of England Inflation Report, November
  • UK Labour Market Report, October
  • Japan’s Machine Orders, September
  • Japan’s Producer Price Index, October
  • India’s Consumer Price Index (CPI), October
  • India’s Index of Industrial Production, September
November 27, 2014
  • Euro zone Economic Sentiment, November
  • Japan’s Consumer Price Index, October
  • Japan’s Industrial Production, October
  • Japan’s Unemployment Rate, October
  • Japan’s Retail Sales, October
November 13, 2014
  • US Treasury Budget, October
  • China’s Industrial Production, October
  • China’s Retail Sales, October
November 28, 2014
  • US Chicago PMI, November
  • Euro zone Consumer Price Index, November
  • Euro zone Unemployment Rate, October
  • India’s GDP estimate, July-September
  • India’s Core Sector Growth, October
  • India’s Government Finances, April-October
  • India’s CPI for industrial workers, October
November 14, 2014
  • US Retail Sales, October
  • US Import and Export Prices, October
  • US Consumer Sentiment, November
  • US Business Inventories, September
  • Euro zone GDP, Q3 2014
  • Euro zone Consumer Price index, October
  • India’s WPI inflation, October
December 1, 2014
  • US ISM Mfg Index, November
  • US PMI Manufacturing Index, November
  • Euro zone PMI Manufacturing Index, November
  • UK CIPS/PMI Manufacturing Index, November
  • India’s HSBC Manufacturing PMI, November
November 17, 2014
  • US Industrial Production, October
  • US Empire State Mfg Survey, November
  • Euro zone Merchandise Trade, September
December 2, 2014
  • US Motor Vehicle Sales, November
  • US Construction Spending, October
  • Euro zone Producer Price Index, October
  • China’s PMI Composite, November
  • Japan’s PMI Composite, November
  • India’s RBI Fifth Bi-Monthly Monetary Policy Review
November 18, 2014
  • US Producer Price Index – Final Demand, October
  • US Housing Market Index, November
  • US Treasury International Capital, September
  • UK Consumer Price index, October
  • UK Producer Price Index, October
  • Bank of Japan Monetary Policy Review
  • Japan’s PMI Manufacturing Index Flash, November
  • Japan’s All Industry Index, September
December 3, 2014
  • US ADP Employment Report, November
  • US Productivity and Costs, Q3 2014 (Revised)
  • US ISM Non-Mfg Index, November
  • US PMI Services Index, November
  • US Beige Book
  • Euro zone GDP, Q3 2014 (Preliminary)
  • Euro zone PMI Composite, November
  • Euro zone Retail Sales, October
  • UK CIPS/PMI Services Index, November
  • India’s HSBC Services PMI, November
November 19, 2014
  • US Federal Open Market Committee (FOMC) Minutes
  • US Housing Starts, October
  • Bank of England Monetary Policy Minutes
  • China’s PMI Flash Mfg Index, November
  • Japan’s Merchandise Trade, October
December 4, 2014
  • European Central Bank Monetary Policy Review
  • Bank of England Monetary Policy Review
November 20, 2014
  • US Existing Home Sales, October
  • US Philadelphia Fed Survey, November
  • US PMI Manufacturing Index Flash, November
  • US Consumer Price Index, October
  • US Leading Indicators, October
  • Euro zone PMI Composite Flash, November
  • Euro zone Consumer Confidence Flash, November
  • UK Retail Sales, October
  • India’s CPI for Rural and Farm Labourers, October
December 5, 2014
  • US Employment Situation, November
  • US International Trade, October
  • US Factory Orders, October
  • US Consumer Credit, October
November 24, 2014
  • US Chicago Fed National Activity Index, October
  • US PMI Services Flash, November
  • US Dallas Fed Mfg Survey, November
  • Bank of Japan Monetary Policy Minutes
December 9, 2014
  • US Wholesale Trade, October
  • UK Industrial Production, October
  • China’s Consumer Price Index, November
  • China’s Producer Price Index, November
  • Japan’s Producer Price Index, November
November 25, 2014
  • US GDP, Q3 2014 (Preliminary)
  • US Consumer Confidence, November
  • US S&P Case-Shiller HPI, September
December 10, 2014
  • US Treasury Budget, November
  • Japan’s Tertiary Index, October

US Fixed Income Markets - Overview

The US Treasuries rose sharply in October with the yield on the 10-year benchmark bond dropping to 2.34% on October 31 from 2.51% on September 30. Bonds began the month on a strong note as the IMF’s downgrade of global economic growth spurred demand. Bonds also rose following a slew of weak economic data from the Eurozone. Some domestic economic indicators including retail sales, durable goods orders and services sector data boosted the Treasuries’ safe-haven appeal. However, a further rise was restricted as the US Federal Reserve acknowledged recovery in the US labour market and ended its quantitative easing programme. Sentiment was further dented following the release of upbeat US GDP and housing market data. Among overseas cues, easing concerns about Ebola coupled with higher-than-expected Chinese GDP and industrial output data weighed on Treasuries. Reports that the European Central Bank may purchase regional corporate bonds to boost lending and the Japanese government’s move to invest pension fund assets into equities also put pressure on bonds.

US 10-year Govt. Bond Yield

Learning Centre– Corporate Bond Opportunities Funds

The launch of new government initiatives and sustained improvement in the macroeconomic scenario are expected to bring cheer to not just the common man but also India’s corporate giants. The government’s clearance of projects is expected to drive corporate borrowing. To tap into this investment opportunity, some mutual funds have launched debt-oriented schemes called corporate bond opportunities funds.

What are Corporate Bond Opportunities Funds?

As the name suggests, these funds purchase bonds issued by companies that are well managed (typically rated between AAA and A-) and that are expected to do well in the future. As the economy improves, such companies show potential for a credit upgrade as increased profitability enhances their ability to repay debt. A credit rating upgrade, in turn, causes corporate bond prices to rise and boosts the returns realised by the fund.

Structure and Composition

These funds are structured as open-ended funds and invest in corporate bonds of intermediate and long-term maturity. The fund aims to provide investors with capital appreciation and interest income, while minimising liquidity and credit risk.

Investors should note that a credit upgrade and a subsequent rise in bond price may not always occur. Adverse events such as an unexpected shock to the economy may cause setbacks. Further, corporate bond funds that purchase papers rated lower than AAA carry higher risk, and may find it more difficult to perform well when economic conditions deteriorate. The fund manager has to, therefore, carefully identify and invest in the right companies. In addition, these funds feature a higher exit load than other offerings as they look to stay invested over a medium to long term.

Summing up

Corporate bond funds present an opportunity for investors to tap into the potential of India’s corporate bond market. They are ideal for investors who have little risk tolerance and are capable of staying invested for three years or more. However, as performance of the fund depends in part on the fund manager’s ability to pick the right companies, investors are advised to carefully evaluate the fund manager’s track record, in addition to one’s personal risk-return profile, before investing.

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