ICICI_Debt Market Outlook (Dec)_071216 - ICICI Prudential Mutual Fund

Nov 30, 2016 - Meanwhile, balance in the income account (primary plus secondary) .... duration when interest rates are high, and maintain low duration.
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Credit Markets Credit Ratio For the first time in the last 10 semi-annual periods, the debt-weighted credit ratio rose above 1, which shows the count of debt securities upgraded is more than those downgraded, and surged to 2 times in the first half of the fiscal 2017 compared with the 0.2 times in the second half of fiscal 2016. The credit ratio (number of upgrades to downgrades) came in at 1.2 times compared with 0.8 times. Source: CRISIL

Our Outlook A credit ratio in first half of FY17 has improved to 2 times, this is among the highest in last 5 years. This improvement goes on to show that the credit cycle has bottomed out. With the commodity prices being stable, commodity-led businesses and financial companies that were heavily invested in these sectors will witness further improvement. As capacity utilisation is low, we do not expect further investment in capital expenditure, thus, these companies are expected to repay their loans and reduce debt, thereby improving the balance sheet. Credit profile of many corporates has been improving and we have witnessed upgrades in our portfolios of companies engaged in various sectors. Therefore, it reflects that economic recovery cycle is well underway, and that the credit market is gradually improving. Source: CRISIL

Money Markets Liquidity Currency in circulation fell sharply by 8.9%y-o-y in the week ended November 18, 2016 against 13.8% growth a year ago. The Reserve Bank of India’s (RBI’s) liquidity window witnessed net lending of Rs 1.43 lakh crore in November 2016 (as of November 29) against Rs 3,254 crore in the previous month. Source: RBI, CRISIL Fixed Income Database

Inflation Inflation moderated to 4.2%, a one-year low, in October 2016 from 4.3% in September. This was driven by a drop in food inflation to 3.3% (drop of 60 bps) - especially in vegetables, fruits and pulses; core inflation edged up to 5.1%. Fuel and light inflation (including petrol and diesel) gained up 30 bps in October, driven by higher petrol and diesel inflation. Wholesale Price Index (WPI)-based inflation fell to a four-month low of 3.39% in October 2016 from 3.57% in the previous month. Source: Mospi.Nic.in, CRISIL Centre for Economic Research (CCER)

Bank Credit / Deposit Growth Bank credit growth fell to 7.9% y-o-y in the fortnight ended November 11, 2016 compared with 8.9% y-o-y in the fortnight ended October 14, 2016. Non-food bank credit fell to Rs 72.66 lakh crore as on November 11, 2016 compared with outstanding credit of Rs 72.70 lakh crore on October 14, 2016. Time deposits increased 10.9% y-o-y in the fortnight ended November 11, 2016 against 9.7% y-o-y in the fortnight ended October 14, 2016. Demand deposits witnessed 20.3% y-o-y growth in the fortnight ended November 11, 2016 compared with 18.3% y-o-y growth in the fortnight ended October 14, 2016. India’s M3 money supply rose 10.3% y-o-y in the fortnight ended November 11, 2016 compared with 10.9% a year ago. Reserve money fell by 5.2% y-o-y in the week ended November 18, 2016 compared with 13.7% a year ago. Source: CRISIL

Our Outlook Inter-bank call money rates remained below the repo rate for most of the month mainly owing to comfortable liquidity in the system following the government’s demonetisation decision, which resulted in the banking system witnessing large inflows of funds as customers deposited their defunct higher denomination currencies. Call rates were also supported by the sporadic repo auctions conducted by the Reserve Bank of India (RBI) earlier in the month. However, some stress was witnessed on the rates after the RBI conducted a series of reverse repo auctions to suck out excess liquidity resulting from the demonetisation decision. Further, as a one-off measure to drain away high liquidity, the central bank, on November 26, announced an incremental cash reserve ratio (CRR) of 100% on deposits with banks between September 16 and November 11. Liquidity is expected to remain surplus going forward and RBI will have to make effor