October 2016 | srei
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October 2016

Indian Economy Review

Major institutions continue to favour India

Major global and domestic institutions continue to regard the Indian economy promising. The International Monetary Fund (IMF) has raised projections for India's economic growth by 0.2 percentage points to 7.6% each for 2016-17 and 2017-18. It said the adoption of goods and services tax (GST) is poised to boost India's medium-term growth. On a similar note, S&P Global Ratings said the passage of the GST bill gives it additional conviction of India clocking 8% growth in the next few years. The World Bank said India's GDP growth will remain strong at 7.6% in 2016 and 7.7% in 2017, supported by expectations of rebound in agriculture, civil service pay reforms supporting consumption, increasingly positive contribution from exports and recovery of private investment in the medium term. The Indian government said the use of technology, transparent processes and ease of doing business will help the country grow 8% over the next couple of decades.

Domestic GDP Growth

Domestic GDP Growth


Consumer prices ease in September

India's Consumer Price Index (CPI)-based inflation fell to 4.31% in September from 5.05% in August and 4.41% in September last year. Wholesale prices rose 3.57% from a year earlier in September compared to a rise of 3.74% in August. The Reserve Bank of India (RBI) has forecast upside risks to the 5% inflation target by March 2017 which emerge from food inflation, higher payout following minimum wage revision and the Seventh Pay Commission's recommendations. It also said the implementation of GST can lead to a short-term impact on inflation trajectory.

Government signed agreements with various countries in different fields

India and Russia announced plans to set up a joint venture to build helicopters in India. Russia will pump in $500 million into the National Infrastructure Investment Fund (NIIF) and create a $1 billion fund jointly with India. Both the countries also decided to review strategies to boost bilateral trade and investment, while committing to improve the ease of doing business, including liberalising the travel regime. India notified the revised double tax avoidance agreement with South Korea under which capital gains tax will be levied at source with effect from April 1, 2017. India and Singapore signed three agreements, including two in the area of skill development.

Other important developments in the month

Prime Minister Narendra Modi confirmed that next year's Union Budget will be presented on February 1. The government garnered Rs 65,789 crore from the spectrum auction. It raised about Rs 2,200 crore by selling its 15% stake in National Buildings Construction Corporation (NBCC). The Centre gave in-principle approval to strategic sale and disinvestment in the public sector units as recommended by NITI Aayog. Further, it allowed 100% foreign direct investment (FDI) in 'other financial services' carried out by non-banking finance companies (NBFCs). The government is considering further relaxing FDI norms in several areas, including trading. The Ministry of Finance (MoF) backed the scrapping of restrictions on e-commerce companies that have foreign investment. The government set March 31, 2018 deadline to fully roll out Aadhaar-enabled Direct Benefit Transfer for food, fertiliser and kerosene subsidies. It also came out with sets of draft norms under the bankruptcy code. In addition, it asked public sector banks to identify top borrowers and hand-hold them if they are facing trouble over repayments. The Centre decided to rank and reward high performing districts in the identified areas in order to incentivise implementation of some of the government's flagship schemes. It amended the metrology rules which will allow it to fix retail prices of essential commodities in extraordinary situations.

The government decided to not hold mid-year economic review starting from this year. Further, it unveiled final guidelines of India's regional flights connectivity scheme called UDAN (Ude Desh ka Aam Nagrik), which might start in January next year. Finance Minister Arun Jaitley asked banks to clean-up their books without being held back by fear of anticorruption investigations. The MoF decided to encourage banks to acquire struggling assets in steel, power and shipping sectors and rope in state-run companies to manage them. Central Board of Direct Taxes (CBDT) came out with the final rules for computing the share buyback tax payable under the income tax law. It also launched the service alert for salaried employees in a bid to cut down tax deducted at source (TDS) mismatches.

The Centre asked all employees working in central public sector enterprises (CPSEs) to deposit additional monetary benefits they get in the form of sitting fees, bonus, share in profit, and stock options with the government. The Ministry of Labour has decided to fix the minimum wage at Rs 350 per day for unskilled agricultural labour in C-class towns. The Ministry of Housing and Urban Poverty Alleviation notified the Real Estate (Regulation and Development) (General) Rules, 2016, for the five Union Territories without Legislature. The Ministry of Corporate Affairs launched a Simplified Proforma for Incorporating a Company Electronically (SPICe) e-form. The Centre rejected a proposal to bring all companies with 10 or more workers within the ambit of the Employees' Provident Fund Organisation (EPFO) over worries that it could financially hurt the MSME sector.

Among regulatory developments

The RBI allowed 100% foreign investment through the automatic route in regulated financial services companies other than banks or insurance companies, and also eased external commercial borrowing (ECB) regulations. It allowed start-ups recognised by the government to borrow up to $3 million per financial year for a three-year tenure through ECBs. The central bank also allowed foreign venture capital entities to invest in unlisted Indian companies without its approval.

Telecom Regulatory Authority of India (TRAI) said telecom operators will be liable for non-compliance to rules by third party vendors such as websites and apps for issues related to bill payment and recharges. It imposed a fine of Rs 3,050 crore on Bharti Airtel, Vodafone India and Idea Cellular for violating licence norms by denying adequate interconnection points to Reliance Jio. It also proposed that television households should pay Rs 130 as monthly rental per set-top box for 100 standard definition channels. TRAI asked fixed or wired broadband operators to ensure a minimum 512 kbps download speed at all times.

Airports Authority of India (AAI) launched an air cargo and logistics subsidiary - AAI Cargo Logistics and Allied Services Company Ltd (AAICLAS). The Central Vigilance Commission made it mandatory for the public sector banks to report to it all frauds involving over Rs 1 crore.

Among key economic indicators released in the month

India's industrial production contracted for the second straight month by 0.7% in August compared to a decline of 2.5% in July. Infrastructure output rose 5% in September from 3.2% in August, mainly on the back of improved performance in refinery products, cement, electricity generation and steel. The country's fiscal deficit came in at Rs 4.48 lakh crore for the six-month period ended September, accounting for 83.9% of the Rs 5.34 lakh crore budgeted for the entire year. India's exports increased 4.62% to $22.8 billion in September, while imports fell 2.5% to $31.2 billion, resulting in a trade deficit of $8.33 billion in September compared to $10.16 billion in the same month last year. Indirect tax collections during the first half of the current fiscal grew 25.9% to Rs 4.08 lakh crore mainly on account of 46% jump in excise duty mop-up. Direct tax collections during the six months ended September show that net collections are at Rs 3.27 lakh crore, which is 8.95% more than the net collections for the corresponding period last year.

India's Nikkei/Markit manufacturing Purchasing Managers Index (PMI) fell to 52.1 in September from August's 52.6, while services PMI fell to 52.0 in September from 54.7 in August. India moved up one rank to 130 on the World Bank's ease of doing business ranking this year. The SBI annual Composite Index for October was flat at 50.2 vis-a-viz September. The monthly index declined marginally to 52.1 in October from 52.6 in September.

Indicators Current Previous
Monthly WPI Inflation 3.57% (Sep 2016) 3.74% (Aug 2016)
Industrial Growth -0.7% (Aug 2016) -2.5% (Jul 2016)
Exports $131.40bn (April - September 2016) $133.72bn (April - September 2015)
Imports $174.41bn (April - September 2016) $202.27bn (April - September 2015)
Trade Balance - $43.01bn (April - September 2016) -$68.55bn (April - September 2015)
Gross Tax Collections Rs 6,95,693cr (April-September 2016-17) Rs 5,96,884cr (April-September 2015-16)

IIP Growth

IIP Growth

  • India's industrial production contracted for the second straight month by 0.7% in August compared to a decline of 2.5% in July.

IIP-Core Sector Growth

Core IIP Growth

  • Infrastructure output rose 5% in September from 3.2% in August, mainly on the back of improved performance in refinery products, cement, electricity generation and steel.

Fiscal Deficit

Fiscal Deficit

  • The country's fiscal deficit came in at Rs 4.48 lakh crore for the six-month period ended September, accounting for 83.9% of the Rs 5.34 lakh crore budgeted for the entire year.

Global Economy Review

Global economic growth to remain subdued

According to the International Monetary Fund (IMF), global economic growth is expected to remain subdued following a slowdown in the US and Britain's vote to leave the European Union (EU). Global growth is projected to slow to 3.1% in 2016 before rising to 3.4% in 2017. The forecast is revised down by 0.1% for both years compared with April's forecast.

Uncertainty over US Fed's rate hike persists

Uncertainty over the US Federal Reserve's (Fed's) rate hike continues to weigh on global sentiment. While the Fed maintained status quo on rate hike in the September meeting, its minutes showed that many committee members feel the rate hike would be needed relatively soon. The US economy grew 2.9% in Q3 2016, fastest growth in two years, after growing 1.4% in Q2.

World GDP Growth

World GDP Growth

Major Indicators Current Previous Major Global Central Bank Latest Key Interest Rates
US GDP 2.9% Q3 2016 1.4% Q2 2016 US Fed Funds Rate 0.25-0.50%
US unemployment 4.9% Oct 2016 5.0% Sep 2016 Bank of England 0.25%
UK GDP 2.3% Q3 2016 2.1% Q2 2016 European Central Bank 0.00%
Euro Zone GDP 1.6% Q3 2016 1.6% Q2 2016 Japan Benchmark Rate -0.10%
Japan GDP 0.7% Q2 2016 1.9% Q1 2016    
China GDP 6.7% Q3 2016 6.7% Q2 2016    
Singapore's GDP 0.6% Q3 2016 2.0% Q2 2016    

Key economic indicators

  • Trade deficit increased 3% to $40.7 billion in August, up from a gap of $39.5 billion in July.
  • The economy generated a smaller-than-expected 161,000 nonfarm jobs in October compared to 191,000 in September; the unemployment rate dipped slightly to 4.9% in October compared to 5% in September.
  • Retail sales rose 0.6% in September, a rebound after sales slipped 0.2% in August.
  • Industrial output edged up 0.1% in September after a downwardly revised 0.5% decline in August. Industrial capacity use edged up 0.1 percentage point to 75.4% in September.
  • Consumer Price Index (CPI) inflation increased 0.3% in September after rising 0.2% in August.
  • In housing indicators, existing homes rose 3.2% to a seasonally adjusted annual rate of 5.47 million units in September, highest since June, and following revised sales pace of 5.30 million in August. New home sales increased 3.1% in September to a seasonally adjusted annual rate of 593,000 compared to 575,000 in August.

ECB maintains easy monetary policy

The European Central Bank (ECB) kept interest rates unchanged at a record low and reaffirmed plans to maintain its quantitative easing program at 80 billion euro until March 2017 or beyond if needed. ECB President Mario Draghi said the central bank is aware of the growing costs for the financial sector because of its ultra-loose monetary policy and would rather not have to keep negative interest rates for too long. The region's GDP grew 0.3% on quarter in Q3 and by 1.6% on year.

Key economic indicators

  • Eurozone recorded an 18.4 billion euro surplus in trade in goods with the rest of the world in August, compared with 11.2 billion euros a year ago.
  • Retail sales dropped 0.1% month-on-month in August after a rise of 0.3% in July.
  • The seasonally adjusted unemployment rate was 10.1% in August, same as in July.
  • Industrial production expanded 1.6% in August, compared with July's decline of 0.7%.
  • The ZEW survey of economic expectations rose to 12.3 for October from 5.4 in September.
  • Annual inflation was 0.4% in September 2016, up from 0.2% in August.

UK GDP outlook downgraded on Brexit

The UK economy grew 0.5% on-quarter in Q3 2016 against 0.7% in Q2 post Brexit. Annually, GDP expanded 2.3% in Q3 compared with 2.1% growth in Q2. The IMF downgraded the country's growth forecast for 2017 to 1.1% from 1.3% projected earlier owing to Brexit.

Key economic indicators

  • Public sector net borrowing, excluding public sector banks, jumped by 1.3 billion pounds in September, compared with the same month in 2015.
  • Trade deficit rose to 12.1 billion pounds in August versus a shortfall of 9.5 billion pounds in July.
  • Industrial production fell by a seasonally adjusted 0.4% in August, following 0.1% gain in the preceding month.
  • CPI inflation rose 1.0% in the year to September, compared with a 0.6% rise in the year to August.
  • The ILO jobless rate came in at 4.9% in the three months ended August, unchanged from the three months to July.
  • Retail sales were unchanged in September compared with 0.2% decline in August.

China posts steady growth in Q3 2016

China's GDP grew 6.7% in Q3 2016, same as in Q2, owing to strong government spending and as a booming property market offset weak exports. The World Bank, in its report, said China is expected to continue its gradual transition to slower, but more sustainable, growth, from 6.7% this year to 6.5% in 2017 and 6.3% in 2018.

Key Economic Indicators

  • Exports plunged 10.0% from a year earlier in September, following a decline of 2.8% in August, while imports in September declined 1.9% from a year earlier, reversing a 1.5% increase in August. Trade surplus narrowed to $41.99 billion in September from $52.05 billion in August.
  • CPI inflation rose 1.9% on-year in September, compared with a rise of 1.3% in August.
  • Industrial production rose an annualised 6.1% in September from a year earlier, compared with a 6.3% rise in August.
  • Retail sales jumped 10.7% on-year in September, following an increase of 10.6% in August.
  • Fixed-asset investment increased 8.2% in the January-September period.
  • Industrial profits grew 7.7% in September, slowing sharply from August's 19.5% pace.
  • Official PMI was 50.4 in September, same as in the previous month. Non-manufacturing PMI rose to 53.7 in September from 53.5 in August.

Japan GDP outlook improves

The Bank of Japan (BoJ) maintained its optimistic view on most of the country's nine regions in its quarterly report, signalling confidence that a tightening job market will gradually push up wages and reinforce steady economic recovery. The IMF upgraded its growth projection for the country to 0.5% in 2016 and 0.6% in 2017 from 0.3% and 0.1%, respectively, forecasted in July.

  • Exports fell 6.9% in September from a year earlier, following a 9.6% decline in August, while imports slid 16.3% from a year earlier in September, resulting in a trade surplus of 498.3 billion yen in September compared with a deficit of 18.7 billion yen in August.
  • CPI inflation fell 0.5% from a year earlier in September.
  • The unemployment rate fell to 3.0% in September, compared with 3.1% in August.
  • Industrial output growth was flat in September after posting growth of 1.3% in August.
  • The leading index, which measures future economic activity, rose to 100.9 in August from 100.0 in July.

Singapore GDP grew 0.6% in Q3 2016

Singapore's economic growth slowed sharply to 0.6% on-year in Q3 2016 from 2% growth in Q2. On a quarterly basis, the economy shrank by 4.1% in Q3 following 0.2% growth in Q2. Among key indicators, a) industrial output increased 6.7% annually in September 2016 compared with 0.5% growth in August 2016 and b) exports fell 4.8% in September, after flat growth the previous month.

Domestic Fixed Income Review

Domestic G-sec Yield

6 Month LIBOR

The interbank call money rate remained below the repo rate for most of the month owing to comfortable liquidity in the system amid periodic fund infusion by the RBI in the form of repo auctions and an open market bond purchase auction by the central bank towards the end of the month. However, some stress was witnessed on call rates after the RBI conducted sporadic reverse repo auctions to drain away excess funds. Outflows related to the telecom spectrum auction and FCNR (B) deposits also led to higher rates to a certain extent.

Government security prices (gilts) advanced in the month. The yield of the erstwhile 10-year benchmark bond - the 7.59%, 2026 paper - fell to 6.89% on October 28 from 6.96% on September 30. The yield of the newly-issued 10-year benchmark - the 6.97%, 2026 paper - fell to 6.79% on October 28 from 6.81% on September 30. Bonds registered sharp gains after the RBI's decision to slash interest rates. The central bank cut the repo rate by 25 bps to 6.25%. Comments made by RBI Governor Urjit Patel in the customary analyst conference call following the policy announcement hinted that the central bank may ease monetary policy further, thereby spurring further gilt buying. The RBI said it is now aiming for a neutral real interest rate of 1.25% against 1.50-2.00% earlier. The central bank defines the real interest rate as the difference between the yield on the 364-day Treasury bill and the expected level of inflation over a year. Gilts got a boost from a) soft domestic consumer inflation in September, b) weak US non-farm payrolls, c) the RBI's open market operation bond auction on October 25 for a notified amount of Rs 10,000 crore, and d) sporadic value buying.

However, further rise in gilts was arrested by intermittent rise in global crude oil prices and US benchmark Treasury yields, and weakness in the rupee. Some gains were given up as the RBI's MPC meeting minutes diminished hopes of an interest rate cut in the near term. In the minutes, central bank officials flagged upside risks to domestic inflation in the January-March period. Profit booking ahead of the US Federal Open Markets Committee's upcoming meeting and the US presidential election also weighed on prices.

Among major developments, the RBI allowed banks to consider government securities acquired under the liquidity adjustment facility (LAF) towards the calculation of the statutory liquidity ratio. It also said interest rate futures can be drawn on any money market benchmark, from the earlier 91-day treasury bills (T-Bills). Further, it announced financial sector regulations pertaining to introduction of interest rate options, a centralised hedging facility for Indian subsidiaries of non-resident companies and monitoring of derivative transactions of FPIs. Securities and Exchange Board of India (Sebi) hiked the FPI investment limit in government securities to Rs 1.48 lakh crore, which will be further raised to Rs 1.52 lakh crore next January; the existing limit for FPIs is Rs 1.44 lakh crore.


Fixed Income Indicators

Rates & Liquidity

  28-Oct-16 1 Week Ago 1 Month Ago
Repo 6.25 6.25 6.50
Reverse Repo 5.75 5.75 6.00
CRR 4.00 4.00 4.00
LAF o/s Repo (Rscr) 13718 16287 7910
LAF o/s Rev Repo (Rscr) 16909 4559 3992

Overnight                                         Rate(%)

  28-Oct-16 1 Week Ago 1 Month Ago
Mibor 6.24 6.30 6.54
Call 6.20 6.35 6.40
CBLO 6.20 6.26 6.45
OIS 1Y 6.35 6.34 6.43
OIS 5Y 6.35 6.32 6.31

CDs                                                             Yield(%)

  28-Oct-16 1 Week Ago 1 Month Ago
1-Month 6.43 6.36 6.54
3-Month 6.61 6.54 6.54
6-Month 6.78 6.75 6.72
1-Year 6.90 6.90 7.05

CPs                                                   Yield(%)

  28-Oct-16 1 Week Ago 1 Month Ago
1-Month 6.65 6.80 6.75
3-Month 7.12 7.04 6.75
6-Month 7.56 7.50 7.30
1-Year 7.65 7.65 7.65

Short Term Bonds                                        Yield(%)

  28-Oct-16 1 Week Ago 1 Month Ago
1 Y G-Sec 6.57 6.54 6.60
1 Y AAA 7.15 7.10 7.23
1 Y AA 7.67 7.62 7.75
2 Y G-Sec 6.54 6.55 6.66
2 Y AAA 7.20 7.14 7.27
2 Y AA 7.67 7.61 7.74

Long Term Bonds                          Yield(%)

  28-Oct-16 1 Week Ago 1 Month Ago
5 Y G-Sec 6.70 6.72 6.82
5 Y AAA 7.31 7.26 7.40
5 Y AA 7.96 7.91 8.05
10 Y G-Sec 6.89 6.85 6.92
10 Y AAA 7.51 7.47 7.47
10 Y AA 8.33 8.29 8.29

Top 5 Graded G Secs                                   Yield(%)

  28-Oct-16 Previous Close 1 Month Ago
07.59 GS 2026 6.89 6.89 6.92
06.97 GS 2026 6.79 6.79 6.78
07.61 GS 2030 7.00 7.00 6.92
07.59 GS 2029 7.01 7.02 6.97
07.68 GS 2023 6.84 6.85 6.89


  28-Oct-16 1 Week Ago 1 Month Ago
USD/INR 66.79 66.89 66.46
EURO/INR 72.91 72.98 74.46
GBP/INR 81.30 81.96 86.48
100 JPY/INR 63.44 64.40 66.09
USD/EURO* 0.91 0.92 0.89

*As of October 31, 2016


10 Year G-sec movement


Corporate Bond Yield


Corporate AAA, AA Bond Spreads


Economic Events Calendar

November 11, 2016
  • US University of Michigan's Consumer Sentiment, November
  • India's Index of Industrial Production, September
  November 28, 2016
  • US Dallas Fed Manufacturing Survey, November
  • US Unemployment Rate, October
November 14, 2016
  • Eurozone Industrial Production, September
  • India's CPI Combined Inflation, October
  November 29, 2016
  • US GDP (Preliminary), Q3 2016
  • US S&P Corelogic Case-Shiller HPI, September
  • US Consumer Confidence, November
  • Eurozone Economic Sentiment, November
  • Japan's Industrial Production, October
November 15 , 2016
  • US Retail Sales, October
  • US Empire State Manufacturing Survey
  • US Import and Export Prices, October
  • US Business Inventories, September
  • Eurozone GDP, Q3 2016
  • Eurozone Trade Balance, September
  • UK Consumer Price Index, October
  • UK Producer Price Index, October
  • India's Consumer Price Index Combined Inflation, October
  • India's Wholesale Price Index inflation for October
  November 30, 2016
  • US ADP Employment Report, November
  • US Personal Income and Outlays, October
  • US Chicago PMI, November
  • US Pending Home Sales Index, October
  • US Beige Book
  • Japan's Manufacturing PMI, November
  • China's Caixin Manufacturing PMI, November
  • Eurozone Consumer Price Index, November
  • India's GDP, July-September
November 16, 2016
  • US Producers Price Index - Final Demand, October
  • US Industrial Production, October
  • US Housing Market Index, November
  • US Treasury International Capital, September
  • UK Labour Market Report, October
  December 1, 2016
  • US Motor Vehicle Sales, November
  • US PMI Manufacturing Index, November
  • US ISM Manufacturing Index, November
  • US Construction Spending, October
  • Eurozone Manufacturing PMI, November
  • UK CIPS/PMI Manufacturing Index, November
  • Eurozone Unemployment Rate, October
November 17, 2016
  • US Consumer Price Index, October
  • US Philadelphia Fed Business Outlook Survey, November
  • US Retail Sales, October
  • European Central Bank Monetary Policy Minutes
  • Eurozone Consumer Price Index, October
  December 2, 2016
  • Eurozone Producer Price Index, October
November 21, 2016
  • US Chicago Fed National Activity Index, October
  • Japan's All Industry Index, September
  • India's CPI for rural and farm labourers, October
  December 5, 2016
  • US ISM Non-Manufacturing Index, November
  • US Services PMI, November
  • Eurozone Composite PMI, November
  • Eurozone Retail Sales, October
  • UK CIPS/PMI Services Index, November
November 22, 2016
  • US Existing Home Sales, October
  • Eurozone Consumer Confidence, November
  December 6, 2016
  • US International Trade, October
  • US Productivity and Costs, Q3 2016
  • US Factory Orders, October
  • Eurozone GDP (Preliminary), Q3 2016
November 23, 2016
  • US Federal Open Market Committee Minutes
  • US Durable Goods Orders, October
  • US FHFA House Price Index, September
  • US Manufacturing PMI, November
  • US New Home Sales, October
  • US University of Michigan Consumer Sentiment, November
  • Japan's Manufacturing PMI, November
  December 7, 2016
  • US Consumer Credit, October
  • UK Industrial Production, October
  • UK Consumer Price Index, November
  • China's Trade Balance, November
  • Japan's GDP 9revised), Q3 2016
  • RBI's Sixth Bi-Monthly Monetary Policy Review
November 24, 2016
  • Japan's Consumer Price Index, October
  December 8, 2016
  • European Central Bank Monetary Policy Announcement
  • China's Consumer Price Index, November
  • China's Producer Price Index, November
November 25, 2016
  • US Services PMI, November
  • UK GDP (revised), Q3 2016
  December 9, 2016
  • US Consumer Sentiment, December
  • US Wholesale Trade, October
  • UK Merchandise Trade, October

US Fixed Income Markets - Overview

US treasury prices sharply declined in October, with the yield of the 10 year benchmark bond rising to 1.83% on October 31 as against 1.61% on September 30. Encouraging US and global economic indicators, coupled with the minutes of the Federal Reserve's September 2016 policy meeting increased expectation of a US interest rate hike, and dented demand for bonds. Demand for safe haven treasuries was also dented by worries that inflation could accelerate amid rising oil prices. More losses were however, capped after minutes showed the European Central Bank's policy makers agreed that the euro zone economy needed continued monetary support when they met in September, noting underlying price growth showed no sign of recovery. Prices received a further fillip after European Central Bank (ECB) President Mario Draghi continued to affirm there had been "no discussion" regarding the question of when the bank's bond-buying program would be wound down. Bond prices registered additional gains in line with the UK counterparts on likelihood that the British parliament may have to ratify a UK exit from the European Union.

US 10 Year Govt. Bond Yield


Learning Centre – Call Risk and Put Risk

Compared to plain vanilla bonds, bonds with call and put options benefit the issuer and bondholder respectively. Because of these options, they are often priced differently from regular securities. Below, we broadly describe the risks associated with these securities.

Bonds with a call option permit the issuer to retire all or part of the issue before the scheduled maturity of the paper. Issuers retain the right to resell the callable bond at a lower interest rate in the event that market yields decline in the future.

There are three disadvantages to investing in callable bonds from the bondholder's perspective. First, it is challenging for the bondholder to predict the cash flows that will be received from holding the callable bond over its life. Second, the bond holder is exposed to reinvestment risk, that is, the risk that the proceeds received when the bond is called will have to be reinvested at a lower prevailing market interest rate. Third, callable bonds have limited price appreciation potential in a declining interest rate environment versus a plain vanilla bond owing to price compression.

The opposite of the call risk is the put risk. Bonds with put options benefit bond holders and leaves issuers at a disadvantageous position. An issue with a put provision grants bond holders the right to sell the issue back to the bond issuer at the higher par value in the event that market interest rates rise after the issuance of the paper.

CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any entity covered in the Report and no part of this report should be construed as an investment advice. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL's Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL's Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.