Principal Monthly Insight-28-02-2018 · 2019. 12. 24. · Principal Monthly Insight • However, some respite was seen following better than expected economic data as IIP grew in

February 2018

Monthly Insight

Policy Rates Actual PreviousRepo Rate^ 6.00% 6.00%

Reverse Repo^ 5.75% 5.75%

CRR^ 4.00% 4.00%

Key IndicatorsIndex Of Industrial Production (IIP)

Wholesale Price Index Inflation(WPI)

Export (Y-o-Y)

Import (Y-o-Y)

Current Account Deficit ($ Billions)

Fiscal Deficit FYTD (INR Trillion)

Principal Monthly Insight

Economic Releases in February-2018

Previous

8.80%(Nov-17)

3.58%(Dec-17)

12.36%(Dec-17)

21.12%(Dec-17)

-14.30(Jun-17)

6.21 (Dec-17)

Source: RBI, Thomson Reuters Eikon; ^Based on RBI Bi-monthly Monetary Policy Statement on 07-Feb-2018

7.10%(Dec-17)

2.84%(Jan-18)

9.07%(Jan-18)

26.10%(Jan-18)

-7.20(Sep-17)

6.77 (Jan-18)

Period28-Feb-18

28-Feb-18

28-Feb-18

Actual

• India’s Gross Domestic Product (GDP) grew 7.2% YoY in thethird quarter of FY18, better than upwardly revised growth of6.5% (6.3% originally reported) in the previous quarterdriven by pick up in manufacturing and spending. On GrossValue Added (GVA) basis, the economy rose 6.7%, betterthan upwardly revised growth of 6.2% (6.1% originallyreported) rise in the quarter ended Sep 2017. Manufacturingoutput at GVA basic prices rose 8.1% in the Dec quarter, upfrom downwardly revised growth of 6.9% (7.0% originallyreported) in Sep quarter. On the other hand, agriculture,forestry & fishing output at GVA prices increased 4.1%,faster than upwardly revised 2.7% (2.3% originally reported)expansion in the previous quarter.

• The Monetary Policy Committee (MPC) in its sixth bi-monthly policy review kept key policy repo rate unchanged at6.0% and also retained its “neutral” stance. Consequently,the reverse repo rate stood unaltered at 5.75%, and themarginal standing facility (MSF) rate and bank rate eachremained at 6.25%. Five policymakers were in favour of themonetary policy decision and one advocated for a policy rateincrease of 25 bps.

• The Consumer Price Index (CPI)-based inflation grew 5.07%in Jan 2018, down from 5.21% in the previous month and upfrom 3.17% in the same month of the previous year. Retailinflation growth thus surpassed the Central Bank's medium-term target of 4% for the third consecutive month.

• India’s Index of Industrial Production (IIP) grew 7.1% in Dec2017 as against upwardly revised growth of 8.8% in Nov 2017(8.4% originally reported) and 2.4% in the same period of theprevious year. The manufacturing sector also surged 8.4% inDec 2017 from 0.6% in the same period of the previous year.However, IIP growth for Apr to Dec 2017 slowed to 3.7%from 5.1% in the same period of the previous fiscal.

• India’s Wholesale Price Index (WPI)-based inflation eased toa six-month low of 2.84% in Jan 2018 from 3.58% in Dec2017 and 4.26% in Jan 2017. Inflation on food articles slowedto 3.00% in Jan 2018, from 4.72% in Dec 2017.

• India’s export during the month of Jan 2018 increased 9.07%YoY to $24.38 billion from $22.36 billion in Jan 2017.Similarly, import grew 26.10% YoY to $40.68 billion from$32.26 billion in the same period of the previous year. Tradedeficit widened to $16.30 billion during the period, which isthe highest since Jun 2013, as against $9.90 billion in Jan2017.

Indian Economy

-4.00

0.00

4.00

8.00

Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

Source: Office of the Economic Adviser, Ministry of Commerce & Industry

Monthly WPI Movement

Gro

wth

( in

%)

0.00

2.50

5.00

7.50

Jan-17 May-17 Sep-17 Jan-18

WPI CPISource: MOSPI

WPI & CPI Movement over last 1-year

Gro

wth

(In

%)

-15.00

-5.00

5.00

15.00

Dec-16 Apr-17 Aug-17 Dec-17

IIP (%MoM) IIP (%YoY)Source: MOSPI

IIP Movement

Gro

wth

(In

%)

Principal Monthly Insight 1 | P a g e February 2018 ...

Index PE Ratio & Returns*Closing Values# 1 Year 3 Year 5 Year

Nifty 50 10,492.85 18.17 5.63 13.00

Nifty 50 PE 21.86 20.71 16.31 15.66

S&P BSE Sensex 34,184.04 18.93 5.20 12.62

S&P BSE Sensex PE 22.71 21.31 16.76 15.11


Source: NSE, BSE, * Returns less than 1 year are absolute, greater than 1 year are Compounded Annualized , # As on 28-Feb-2018

• The Union Budget 2018-19 played a pivotal role during themonth under review and domestic equity markets witnessedmajor fall as investors closely followed developments on theimplementation of budget proposals. The finance ministerraising the fiscal deficit target for FY19 and levying 10%long-term capital gains (LTCG) tax on gains above Rs. 1lakh from equity had a detrimental effect on investorsentiment. Worries over probable rate hike by the MPC anda major state-owned bank’s fraudulent and unauthorisedtransactions also set the markets back. Additionally,concerns that the U.S. Federal Reserve (Fed) might raiseinterest rates in its Mar 2018 meeting dented marketsentiment. However, upbeat economic data limited the fall.

• During the month, key benchmark indices S&P BSE Sensexand Nifty 50 fell 4.95% and 4.85% to close at 34,184.04 and10,492.85, respectively. Meanwhile, S&P BSE Mid-Cap andS&P BSE Small-Cap declined 4.62% and 3.15%,respectively.

• Initially, Indian equity markets witnessed heavy fall asinvestors closely followed developments on theimplementation of Budget proposals, especially, fiscal deficittarget. The finance minister raised the fiscal deficit target forFY18 to 3.5% of GDP as against 3.2% earlier. The target forFY19 has been fixed at 3.3% as against previous target of3%.

• Also, government’s proposal of levying 10% LTCG tax ongains above Rs. 1 lakh from equity weighed on marketsentiment. Announcement by a major credit rating agencythat high debt burden of the government constrains India'srating upgrade further affected buying interest.

• Later, market sentiment dented after a major state-ownedbank detected fraudulent and unauthorised transactions atone of its branches in Mumbai. Investors became wary of thelong-term impact of the bank’s fraudulent transaction case assome of the other public-sector banks too had exposure tothe banking scam. Additionally, the state-owned bankdisclosed that the amount of fraudulent transactions couldbe approximately Rs. 13 billion, which is higher thanestimated.

• Furthermore, inflation concerns muted buying interest asretail inflation grew 5.07% in Jan 2018, down from 5.21%MoM and up from 3.17% YoY. Retail inflation growth hassurpassed the Central Bank's medium-term target of 4% forthe third consecutive month.

• Concerns over fiscal deficit also played a spoilsport afterIndia's fiscal deficit during Apr to Jan 2018 came in at113.7% of the budgeted target for FY18.

Indian Equity Market

-8.62%

-8.56%

-6.32%-5.74%

-5.39%

-5.27%

-4.95%

-4.85%

-4.85%

-4.62%

-4.29%

-4.15%

-3.15%

-3.07%

-1.91%

-1.64%

-1.31%

-0.41%

-12% -8% -4% 0%

S&P BSE Bankex

S&P BSE PSU

S&P BSE Capital Goods

S&P BSE Consumer Durables

S&P BSE Realty

S&P BSE Oil & Gas

S&P BSE Sensex

S&P BSE100

Nifty 50

S&P BSE Mid cap

S&P BSE Auto

S&P BSE Power

S&P BSE Small cap

S&P BSE Health care

S&P BSE FMCG

S&P BSE Metal

S&P BSE Teck

S&P BSE IT

Source: MFI Explorer

0

900

1,800

2,700

Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18

S&P BSE Mid cap S&P BSE Sensex S&P BSE Small cap

Growth of Rs 1,000 over Last 10-Yrs

Source : MFI Explorer

InR

s.

Growth of Rs 1,000 over Last 10-Yrs

Source : MFI Explorer

InR

s.

Monthly returns as on February 28, 2018

0

40

80

120

Feb-16 Aug-16 Feb-17 Aug-17 Feb-18

P/E

-S&

P BS

E Se

nsex

, N

ifty

50,

Nif

ty M

idca

p 50

Nifty 50 Nifty Midcap 50 S&P BSE Sensex

Domestic Benchmark Indices Trailing P/E

Source : Thomson Reuters Eikon, NSE



• However, some respite was seen following better than expectedeconomic data as IIP grew in Dec 2017 while WPI-basedinflation eased to a six-month low in Jan 2018. India’s GDPalso posted better than expecetd growth in the third quarter ofFY18 and the index of eight core industries also grew in Jan.

• On the global front, U.S. policymakers' effort to end a briefgovernment shutdown until Mar 23 brought some relief. But,speculation over imminent rate hike by the U.S. Fed in its Mar2018 meeting kept market participants wary.

• On the BSE sectoral front, all the major indices closed in thered. S&P BSE Bankex was the major loser followed by S&PBSE PSU and S&P BSE Capital Goods sectors. The bankingsector was impacted by fraudulent transaction in a major PSUbank and on announcement by the finance ministry of a 15-daydeadline to state-run banks to take pre-emptive action, identifyand address operational and technological risks.

• The Securities and Exchange Board of India (SEBI) asked fund houses to prominently disclose the total expense ratio (TER), on daily basis,for all schemes under a separate head, "Total Expense ratio", on their websites. The disclosure will increase transparency in mutual fundschemes and make them more investor friendly.

• The Central Bank scrapped several loan restructuring programmes prevalent among banks to restructure defaulted loans. Almost all theschemes such as the Corporate Debt Restructuring, Sustainable Structuring of Stressed Assets or S4A, Strategic Debt Restructuring, andFlexible Structuring of Existing Long-Term Project Loans have been abolished by the Central Bank. Also, the bank has made resolution ofdefaults time bound with the Insolvency and Bankruptcy Code becoming the main tool to deal with defaulters.

• MPC decided to remove the currently applicable loan limits of Rs. 50 million and Rs. 100 million per borrower to Micro, Small andMedium Enterprises (Services) for classification under priority sector. Hence, all bank loans to MSMEs, that are engaged in providingservices as defined in terms of investment in equipment under Micro, Small and Medium Enterprises Development (MSMED) Act, 2006,shall qualify under priority sector without any credit caps.

• Government granted infrastructure status to affordable housing. This would allow these projects to avail benefits such as lower borrowingrates, tax concessions and increased flow of foreign and private capital. The government has made several efforts to create enablingenvironment and ecosystem to promote affordable housing. This announcement comes as a part of such effort.

• The Insolvency and Bankruptcy Board of India (IBBI) revised its guidelines, thereby delegating more responsibilities on the resolutionprofessional and with stricter time lines. IBBI has directed the resolution professional to provide evaluation matrix to prospectiveresolution applicants and appoint two registered valuers to arrive at liquidation value and fair value of the company.

• The Central Bank raised the forex futures trading limit to $100 million. It expects that increase in the upper limit would lure business awayfrom regional financial hubs as it is expected to boost daily trading volumes on domestic exchanges. The move will also create arbitrageopportunity between onshore and offshore markets.

• SEBI permitted the National Stock Exchange and Bombay Stock Exchange to trade in cross currency derivatives. The move is expected tohelp increase liquidity in the market and thereby expand scope for currency futures and options market.

Regulatory Update

33,500

34,400

35,300

36,200

-2,600

-900

800

2,500

1-Feb-18 10-Feb-18 19-Feb-18 28-Feb-18 S&P

BSE

Sens

ex In

dex

valu

e

Net

Inve

stm

ent b

y FI

I/FP

I &

DII

in R

s. C

r.

FII/FPI Net investment DII Net investment S&P BSE SensexSource: MFI Explorer

Source : Reuters

28,000

31,000

34,000

37,000

-21,000

-3,000

15,000

33,000

Feb-17 Jun-17 Oct-17 Feb-18

FII/FPI Net investment DII Net investment S&P BSE Sensex

Source: MFI Explorer

Net

Inve

stm

ent b

y FI

I/FP

I &

DII

in R

s. C

r.

S&P

BSE

Sens

ex In

dex

valu

e

FII, DII Investment & Sensex - February 2018

FII/FPI, DII Net Investment & Sensex Movement in last 12 Mths


Key Rates (%)Reverse Repo Rate

Repo Rate

CRR

SLR

Bank Rate

Debt Indicators (Yield %)Call Rate

FBIL 1 Mn Term Mibor

10-Yr Benchmark Bond

91-Day T-Bill#

182- Day T-Bill#

364-Day T-Bill#

Source: RBI

# Indicates Monthly Average cut off during Auction

6.63%

6.35%

6.43%

6.54%

6.50%

6.37%

Feb-18

5.75 5.75

6.00 6.00

4.00 4.00

19.50 19.50


Current^RBI Policy Rates

5.93% 5.92%

6.36%

7.43%

6.25 6.25

7.73%

6.41%

Previous

^Based on RBI Bi-monthly Monetary Policy Statement on 07-Feb-2018

Jan-18

• Bond yields surged for the seventh consecutive month afterthe government widened its fiscal deficit target for FY19.Yields further rose following rise in the U.S. Treasury yields.However, losses were trimmed as the MPC meeting was lesshawkish than feared by investors. Value buying restrictedyields to some extent.

• Yield on the 10-year benchmark bond (7.17% GS 2028)jumped 30 bps to close at 7.73% from the previous month’sclose of 7.43%. Bond yields moved within a wide range of7.40% to 7.82%.

• Bond yields soared on the first day of Feb 2018 after thegovernment in the Union Budget 2018-19 widened its fiscaldeficit aim to 3.3% for FY19 compared with the previoustarget of 3%. Investors were also concerned that greater ruralspending will increase inflation.

• Later, losses started recovering amid news that the CentralBank may conduct open market as well as secondary marketpurchases of debt. Yields fell further on reports that thegovernment is in discussion with the Central Bank to raiseforeign investment limit in government debt. Lower thanscheduled debt sale in FY18 amid high yields and fall ininternational crude oil prices also boosted sentiment.

• Most of the losses were recovered as MPC at its sixth policymeeting was less hawkish than feared by investors. Also, noclarity on future rate hike by MPC soothed investors’ nerves.According to MPC, inflation is expected in the range of 5.1%-5.6% in the first half of FY19, including diminishingstatistical HRA impact of Central government employees,and in the range of 4.5%-4.6% in the second half, with riskstilted to the upside.

• Yields started rising again amid fresh supply of stategovernment debt and following rise in U.S. Treasury yields.Yields continued to increase as minutes of the latest MPCmeeting showed that members were concerned about risinginflation, thereby increasing the possibility of rate-hike in thenear term. However, losses were restricted to some extent dueto value buying.

• At the end, yields closed at higher levels amid sharp fall inrupee and gains in U.S. Treasury yields due to U.S. Fedchairman’s indication of rate hike.

Indian Fixed Income

6.30

6.80

7.30

7.80


Source: CCIL

10-Yr Benchmark Bond Yield

Yie

ld (I

n %

)

0

35

70

105

6.10

6.80

7.50

8.20

1 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cha

nge

in b

ps

Yie

ld (I

n %

)

India Yield Curve Shift (Y-o-Y)

Change in bps Feb-18 Feb-17Source: Thomson Reuters Eikon

0

13

26

39

6.60

7.20

7.80

8.40

1 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cha

nge

in b

ps

Yie

ld (I

n %

)

India Yield Curve Shift (M-o-M)

Change in bps Feb-18 Jan-18Source: Thomson Reuters Eikon



• On the liquidity front, the interbank liquidity surplusdecreased during the month under review. The overnight callrate traded below the policy repo rate for most of the monththat ranged from 5.63% to 6.00%, which reflected thatliquidity remained at comfortable levels during the monthunder review. Banks’ net average lending to the Central Bankthrough the LAF window fell to Rs. 8,851.86 crore in Feb2018 from the previous month’s average lending of Rs.14,984.50 crore. Banks’ average borrowings under theMarginal Standing Facility (MSF) window increased to Rs.760.13 crore in from the previous month’s average borrowingof Rs. 421.74 crore.

• To absorb excess liquidity from the banking sector, theCentral Bank conducted variable reverse repo auctions ofvarious tenors. Average net absorption of liquidity throughvariable repo rate and reverse repo auctions stood at Rs.2,146.64 crore in Feb 2018 compared with net lending of Rs.9,451.83 crore in Jan 2018. After considering the entire gamutof LAF, MSF, term repo auction, reverse repo auction, openmarket operations and market stabilization scheme, theaverage net absorption of liquidity fell to Rs. 10,445.68 crorein Feb from Rs. 24,102.46 crore in Jan.

• The Central Bank conducted auctions of 91-, 182-, and 364-days Treasury Bills for a notified amount of Rs. 56,000 crorein Feb 2018 compared with Rs. 55,000 crore in the previousmonth. The cut-off yield stood in the range of 6.36% to6.66% during the month under review.

• The Central Bank also conducted auction of statedevelopment loans for a total notified amount of Rs. 54,425crore compared with the previous month when the totalnotified amount was Rs. 29,820 crore. The accepted amountstood at Rs. 45,046 crore and the cut-off yield ranged from7.56% to 8.37%.

• The Central Bank also conducted auctions of threegovernment securities for a notified amount of Rs. 22,000crore for which Rs. 11,000 crore were accepted. The cut-offprice ranged from Rs. 96.85 to Rs. 97.85, while the cut-offyield ranged from 7.07% to 7.48%.

• Yield on gilt securities surged across maturities in the rangeof 4 to 36 bps. Highest rise was seen on 10-year paper whilelowest increase was on 1- and 2-year papers. Yield oncorporate bonds also jumped across maturities in the range of19 to 40 bps. Highest rise was seen on 15-year paper whilelowest increase was on 4-year paper. Difference in spreadbetween AAA corporate bond and gilt expanded acrosssegments in the range of 3 to 21 bps. Spread rose the most on2-year paper and the least on 10-year paper.

18.00

21.00

24.00

27.00

2.00

5.00

8.00

11.00

Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18

Source: RBI Reverse Repo Repo CRR Bank Rate SLR

Movements of Key Policy Rates in India

Rep

o,R

ever

se R

epo,

CR

R, S

LR &

Ba

nk R

ate

(In

%)

SLR

(In

%)

10

55

100

145


5 Year Corporate Bond Spread (for AAA & AA bonds)

AAA Bond Spread (in bps) AA Bond Spread (in bps)Source: Thomson Reuters Eikon

In b

ps

0

60

120

180


10 Year Corporate Bond Spread (for AAA & AA bonds)

AAA Bond Spread (in bps) AA Bond Spread (in bps)Source: Thomson Reuters Eikon

In b

ps

-40,000

20,000

80,000

140,000

4.70

6.60

8.50

10.40

Feb-16 Aug-16 Feb-17 Aug-17 Feb-18Call Rate Net Borrowings

Liquidity Monitor - Call Rate and Net Borrowings

Cal

l Rat

e (I

n %

)

Source: Thomson Reuters Eikon

LAF

(In

Rs.

Cr.

)


65.10 63.69 64.43 66.74

79.59 79.21 76.49 70.72

90.45 90.35 86.80 83.05

60.80 58.60 57.46 59.35

1 Wk Ago1 Mth Ago

6 Mths Ago

1 Year Ago

Crude Brent($/Barrel)

66.72 3.36 -1.37 24.76 27.21

Gold ($/Oz) 1,317.66 -0.47 -2.01 -0.30 5.54

Gold (Rs./10 gm) 30,398.00 0.02 0.63 3.20 2.73

Silver ($/Oz) 16.41 -0.52 -5.23 -6.61 -10.38

Silver (Rs./Kg) 38,189.00 0.22 -2.24 -3.45 -11.61

Performance of various CommoditiesReturns (in %)

Value(as of 28-Feb-2018)

Source: Thomson Reuters Eikon, MCX

Commodities


1 Mth Ago

3 Mths Ago

Movement of Major Currencies (Denominated in Indian Rupee)

Source: RBI

Currency

INR/1 USD

INR/1 EURO

INR/1 GBP

INR/ 100 YEN

1 Year Ago

Value(as of 28-Feb-

2018)

INR• The rupee initially fell against the greenback following losses

in the domestic equity market after the government widenedits fiscal deficit aim for FY19. Indication of a rate hike by theFed in the near term also weighed on market sentiment. Therupee fell further amid reports that approval norms might betightened for firms borrowing funds offshore. Losses wereextended after minutes of the Fed’s monetary policy reviewin Jan 2018 showed inclination towards faster rate hikes thisyear amid hopes of stronger U.S. economic growth.

Euro• The euro rose initially against the greenback after eurozone's

manufacturing Purchasing Managers' Index (PMI) rose to itshighest level in over 20 years in Jan 2018. However, thetrend reversed following upbeat U.S. services sector PMIdata for the same month. Losses in the euro retreated tosome extent as market participants remained concerned overthe rising U.S. fiscal deficit due to high government spendingand large corporate tax cuts, which weakened thegreenback. The euro fell further against the greenback in thelatter half of the month after the new U.S. Fed chief hinted ata faster pace of rate hikes in 2018.

Currency

Crude• Brent crude prices remained weak amid persisting worries

over global supply glut. Also, Organization of the PetroleumExporting Countries (OPEC) member Iran announced plansto raise its production within the next four years by at least700,000 barrels a day. Nonetheless, oil prices continued toget underlying support from the growing endeavours ofOPEC and non-OPEC members towards curbing supply glutby means of production cut. However, oil prices could nothold on to gains amid worries over rise in U.S. crude oilproduction, which in turn may diminish OPEC’s efforts atcurbing global crude oil supply. The International EnergyAgency (IEA) predicted that the U.S. will surpass Russia asthe world’s biggest oil producer by 2019, if not sooner.

Gold• Gold prices were initially hit as optimism over the health of

the U.S. labour market contributed to the speculation of arate hike by the U.S. Fed in its upcoming meeting in Mar2018. Concerns over U.S. government shutdown, whichinitially supported the safe haven appeal of the preciousmetal, was subsequently eased after the U.S. Congressleaders reached a two-year budget deal to raise governmentspending by almost $300 billion. Towards the end, thebullion was hit as the new U.S. Fed chief’s first testimonyraised speculations that the central bank may raise ratesmore than the three times currently being anticipated,although he stressed on not prejudging the new set ofprojections.

Commodity

63

65

67Feb-17 Jun-17 Oct-17 Feb-18

Rupee Versus Dollar during the year

Rup

eepe

r D

olla

r

Source: RBI

70

100

130

160


Movement of Commodity Prices Over 1 Year (Rebased to 100)

Gold (US$) Silver (US$) Brent CrudeSource:Thomson Reuters Eikon

In U

.S.D

olla

r


FSE DAX

Europe

-5.71Germany

-6.36

-4.95

-0.36

Shanghai SE Composite

S&P BSE Sensex

S&P/ASX 200

FTSE 100

CAC 40

-4.46

SET IDX

JSX Composite

FTSE Straits Times

KOSPI

Hang Seng

-1.38

-3.89

Thailand

Indonesia

Singapore -0.45

Source: MFI Explorer & Thomson Reuters Eikon

-5.42

-6.21

S. Korea

Hong Kong

NIKKEI 225

India

Australia

-4.00

-2.94

U.K.

France

Japan

China


Performance of Major International Markets (as on February 28,2018)

Asia Pacific0.18

-0.13

-4.28

U.S.

U.S.

U.S.

United StatesNasdaq 100

S&P 500

DJ Industrial Average

1 MthCountryIndices

United States • U.S. markets witnessed initial selling pressure amid concerns

over rising inflation and speculation over imminent rate hikeby the U.S. Fed in its Mar policy meeting. Mixed economicdata could not provide much support. However, thedownturn was restricted as worries over political deadlockeased to some extent after the U.S. President signed a stopgapfunding measure. Later, markets fell after the new U.S. Fedchief’s comment raised speculation that the central bank mayraise rates more than market expectations.

Europe• Weakness in Wall Street and second phase of Brexit talks

weighed on European markets. Sentiment dampened furtheras official data showed that the nation’s economy grew lowerthan estimated in the fourth quarter and on possibility thatFed may be more aggressive in hiking interest rates during theyear. However, downside was limited as investors tookpositive cues from GDP data of Germany and the eurozone.

Asia• Asian markets took cues from weak global peers and falling

crude oil prices. Speculation over imminent rate hike by theU.S. Fed raised concerns over foreign fund outflow fromemerging markets. Positive economic data and expectationsover easing monetary policy in Japan also helped sentiment.

• Yield on the 10-year U.S. Treasury bond surged 15 bps duringthe month to close at 2.87% compared with the previousmonth’s close of 2.72%. The paper moved in a range of2.77% to 2.94%.

• U.S. Treasury prices fell as data showed better than expectednon-farm payroll data along with the biggest annual wageincrease since 2009 in Jan 2018. Improving risk appetitediminished the safe-haven appeal of U.S. debt that can beattributed to strong U.S. economic growth prospects. Losseswere extended after data showed that U.S. consumer pricesrose more than expected in Jan posting their biggest gain in ayear, thereby increasing the possibility of a faster pace ofinterest rate hikes. Also, statement by the new chief of theU.S. Fed that central bank might raise key short-termborrowing costs four times in 2018, higher than currentlybeing anticipated, added to the losses.

• However, losses were capped as a volatile equity marketprompted investors to purchase less risky bonds. Also, someinvestors were reluctant to sell the U.S. Treasury bonds untilthey see signs of stabilization. Further, weak domestic newhome sales for Jan 2018 supported bond demand.

Global Equity Market

Global Fixed Income - U.S.

0

8

16

24

0.60

1.60

2.60

3.60

1 M

onth

3 M

onth

s

6 M

onth

s

1 Y

ear

2 Y

ears

3 Y

ears

5 Y

ears

7 Y

ears

10 Y

ears

30 Y

ears

Cha

nge

in b

ps

Yie

ld (I

n %

)

U.S. Treasury Yield Curve Shift (M-o-M)

Change in bps 28-Feb-18 31-Jan-18Source: Thomson Reuters Eikon

1.95

2.30

2.65

3.00


Yie

ld (

In %

)

U.S. 10 Year Treasury Yield

Source: Thomson Reuters Eikon

Movement during the Month



Government’s recapitalisation plan for banks

Investment Classroom

Recapitalisation

Recapitalisation comes into the picture when things aren’t going right within a company. It refers to putting in fresh capital to improve thefinancial health of a company. Capital is the money invested by shareholders in a business.With regards to state-run banks, the onus of injecting the capital falls on the government as it has the majority stakeholder.The financial health of a bank is in bad state when its liabilities are higher than the assets. The government can infuse capital either by buyingnew shares or by issuing bonds.

The plan

In October 2017, the government announced capital infusion of Rs. 2.11 lakh crore in public sector banks -Re-capitalisation bonds worth Rs.1.35 lakh crore would be floated and Rs. 58,000 crore will be raised from the market by diluting government stake.

Details: The program is a part of the government’s Indradhanus plan that laid out Rs. 70,000 crore to be given to banks over a period of fouryears ending March 2019. Six banks are under the prompt corrective action of Reserve Bank of India (RBI) -- Bank of India, IDBI Bank, UCOBank, Central Bank of India, Bank of Maharashtra and Dena Bank. These banks will get capital through preferential issue of shares: UCOBank will get Rs. 1,375 crore; Central Bank of India Rs. 323 crore; Bank of India Rs. 2,257 crore, IDBI Bank Rs. 2,729 crore, Bank ofMaharashtra Rs. 650 crore and Dena Bank will receive Rs. 243 crore.

State Bank of India will get Rs. 8,800 crore, while the second-biggest state-run lender Punjab National Bank will get Rs. 5,500 crore.

The government-issued recapitalisation bonds will be subscribed by banks and entered as an investment in their books. This money raised bythe government through these bonds will go back to banks as capital. This will boost the banks’ balance sheets by way of improved capital-adequacy.

Recapitalisation is being supported by corrective measures by the banks’ management and employees. Government is signing a tripartymemorandum of understanding with bank management and employee unions. The recapitalisation plan has been made performance-based,unlike till 2014-15 when it was need-based. Return on assets is being used as the basic criteria for capital infusion.

Why banks need it

Indian state-run banks have been reeling under Non-Performing Assets (NPAs) for quite some time now. Their NPAs have increased to Rs.7.33 lakh crore as of Sep 2017 from Rs. 1.5 lakh crore in Mar 2013.The reasons behind this dismal position of banks are various, such as -- lending aggressively during good market conditions, negligence incredit risk appraisal and loan monitoring, wilful default or loan frauds in some cases, and slowdown in the global economy.This casts a dark shadow on the Indian banking and financial sector and creates a bad image globally, which inadvertently affects business. Forinstance, India was ranked fifth on the list of countries with highest NPAs, with top spot among the BRICS nations, by a reputed rating report.

How will it help the sector/economy

The drive will rejuvenate the banking sector – banks will be able to extend fresh credits and increase private investments, which will mitigatethe stressed asset problem to some extent. As the government is not putting the money from the state exchequer, it does not have an immediateimpact on fiscal deficit. Being a long-term debt, the plan will give time to banks to increase their credit and private investment and thusimprove their balance sheets. Once things get better, the government can sell the bank equities purchased earlier and retire the debt.

Making the plan performance-based will push banks to pull up their socks and get their act together. Though one cannot rule out frauds, thegovernment’s efforts at making banks take pre-emptive actions, identify and address operational and technological risks, will go long way inimproving the performance and image of the sector.



Source for data, graphs and analysis, unless otherwise specified: ICRA Online Research

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Principal Monthly Insight-28-02-2018 · 2019. 12. 24. · Principal Monthly Insight • However, some respite was seen following better than expected economic data as IIP grew in