India 10 Yr Gilt at 1.5 year high

Indian Economic Update

Government has announced additional borrowing of INR 500 bn in Q4 FY2018, higher than our expectation of additional borrowing of INR 250-300 bn.
The gross Gsec issuance will be INR 930 bn in Q4 FY2018 as against INR 430 bn budgeted earlier. Further net issuance of T-Bill has been revised to INR 230 bn through FY2018 as against the budgeted INR 20 bn.
Except for the first auction of Q4, scheduled for the week ending January 5, each weekly auction has been increased by INR 100 bn. 10-14 year bucket will witness the maximum increase in auction (i.e. INR 60 bn) followed by 5-9 year bucket (INR 20 bn). Meanwhile gross T-bill issuances will be ~ INR 1.79 tn in Q4 and net redemption of INR 1.60 tn.
Overall the fiscal deficit for the year is likely to be higher at 3.7% of the GDP though it is still possible that the extra borrowing is on account of funding shortfall. We had anticipated fiscal deficit of ~3.5% of the GDP for FY2018 as against the budgeted 3.2%. The higher fiscal deficit is primarily on account of uncertainty regarding GST collection, likely lower direct tax collection on weaker growth outlook, lower RBI dividend transfer and excise duty cut on petrol and diesel effective October. Given the growth concerns, it seems that the Government is unlikely to resort to significant expenditure cuts. Higher than budgeted disinvestment target is likely to limit the slippage.
The Government has probably used the “escape clause” for fiscal slippage in the FRBM committee recommendation, wherein a maximum deviation of 0.5% of the GDP can be used in case of a sharp decline in real output growth of at least 3 percentage points below the average of previous four quarters, natural disaster or structural reforms which would have unanticipated revenue implications.

Global Update

The European Central Bank published its Economic Bulletin, which forms the basis for Governing Council's policy decisions. The report emphasised that ample degree of monetary accommodation is still needed to secure a return of inflation towards levels that are below, but close to 2%. The Governing Council assessed that the strong cyclical momentum and the significant reduction of economic slack give grounds for greater confidence that inflation will converge towards its target.
US: Advance goods trade balance for November widened to a deficit of USD 69.7 bn versus an estimate of USD 67.9 bn. The deficit was the largest since March 2015.
Media reports suggested that White House interviewed Mr. Richard Clarida, a noted economist and Lawrence Lindsey, head of an economic advisory firm, for the position of vice chairman of the Federal Reserve Board.
US President, Mr. Donald Trump signed the landmark USD 1.5 tn tax reform legislation into a law on Friday. President, Mr. Trump also approved to stopgap funding bill, which averts government shutdown.
The US government has passed the tax reform, which should support the dollar in the near term. Considering the holidays, it remains to be seen how markets react in 2018. Euro weakened against the dollar.


Market activity was largely driven by rollover of derivatives due to expiry of December options series. Government’s announcement of INR 500 bn excess borrowing in the current financial year had minimal impact on equity markets.
Investor sentiment turned sour following the fiscal concerns. Reports emerged that Government was mulling over a breach of deficit target of 3.2%. Fears of an eventual excess borrowing, after the decline in monthly GST revenues also weighed on investor sentiment.


During the week Sensex gained 0.34% to close at 34056.83 while Nifty inclined 0.36% to close at 10530.70.


Domestic gilts suffered major losses as government’s INR 500 bn excess market borrowing weighed on market sentiment. Gilt prices dropped to one-and-a-half-year low.
The already fragile market sentiment is likely to deteriorate further against the backdrop of pickup in inflation trend and expectation of a possible rate hike in FY 2019.
The fiscal slippage to 3.7% of the GDP this year aggravate the concern regarding fiscal consolidation roadmap especially in conjuncture with fiscal deficit target for FY2019. Significant supply of SDL in Q4 is another factor to look out for. On the global front, the normalisation of policy rate in developed economies has the potential to push yields higher, especially US and will have implication of G-Sec markets.


The 10Y benchmark yield ended at 7.28% vs. previous week’s close of 7.27%.


According to the API data released, crude oil inventories in the United States decreased by 6 million barrels in the week to  December 22 to 432.8 million, while gasoline stocks rose by 3.1 million barrels. Further details of the report revealed that refinery crude runs increased by 268,000 bpd. Pipeline outages in Libya and the North Sea have also been supporting oil prices.
Crude prices were weighed down from some of their highest levels since 2015, due to rising US output and the expected reports of the Forties pipeline in the North Sea reopening in January next year. However, prices remained well supported by the ongoing supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia.
The global benchmark has risen 17% this year since OPEC plus Russia and other non-members, have withheld output to get rid of the oil glut.


The yellow metal reached a one year high as a retreat in the dollar on the back of lower U.S. bond yields drove gains in commodities priced in the currency. The metal also benefitted from technically driven momentum after closing above its 100-day moving average in the previous session.
The yellow metal is on track to record a second weekly gain in part due to a weaker dollar this week despite progress on tax reforms, as markets have already priced in a tax overhaul by the Trump government.


Trade remained muted in the absence of major triggers before year-end. Dollar sales by some foreign banks trigger stop-losses in the intra-day trade. Weakness in the dollar index supported the local currency.

RBI injected liquidity to the tune of INR 651.25 mn (net) under LAF (including fixed and variable rate repos and reverse repos), as of December 27. It injected INR 8.85 bn and INR 20.79 bn under Marginal Standing Facility and Special Refinance Facility, respectively.


Source: ICICI Bank Research, Bloomberg and CRISIL.