Indian Economy’s 1 Year Challenge: January FY18 Vs. January FY19

We decided to extend the 1-year challenge to the Indian economy and the results have been fascinating. After the rate hike cycle starting in June, the Repo rates increased by 50 bps within the twelve-month period. However, the weighted average call money rate (WACR) has been volatile despite the 50 bps differential maintained on average by the end of the time frame. The overnight lending rate depicted the insecurities amongst banks as liquidity worsened during the year.

These liquidity issues found their way to money market instrument valuations as well, deeming them riskier. Short term debt instruments (364 day) showed signs of stress as yields increased 40 bps as compared to same time last year. Slightly higher in the duration, 2 year sovereign instruments settled with pretty much the same yield structure. The biggest surprise was however delivered by the long term sovereign instruments (10-year duration), which actually saw yields plummet (-) 13 bps as compared to same time last year. The yield curve of India sovereign debt therefore showed signs of flattening – a condition, which is often times a sign of recession. Though in the context of India, the situation is more financial in nature than economics and resulted from strong increase in HTM investments by commercial banks. Subsiding interest rate insecurities have also helped, positively impacting yield expectations.

Corporate debt was however not lucky as yields of AA and AAA rated corporate debt increased by 62 bps and 42 bps, respectively. The default of certain too big to fall group entities (and associated SPVs) can be blamed for this debacle. Resultantly, the yield differential between AAA and 10 year sovereign India debt increased to 128 bps as compared to just 50 bps same time last year; a growth of 314%. Surprising however, rising yields did not deter entities from raising money from the market as substituting credit offtake remained extremely strong. Commercial banks recorded their offtake number at nearly 15% as compared to 9.5%, same time last year. To an extent, the situation can be linked to the liquidity situation as Credit to Deposit ratio touched 80% for the first time in Indian banking history. As far as other capital market asset class, equities are concerned, the returns remained similar to that of last year. The returns from NSE 100 and BSE 100 indexes was recorded nearly the same as compared to same time last year.

 

Interest rate & ratio:

Interest Rate

Jan-18

Apr-18

Jul-18

Oct-18

Jan-19

Policy Repo Rate

6

6

6.25

6.5

6.5

Call Money Rate (WA)

5.86

5.85

6.13

6.39

6.35

364 Day Treasury Bill Yield

6.49

6.47

7.2

7.49

6.88

2 Yr Indian G Sec

6.9

7.3

7.6

7.6

7

10 Yr Indian G Sec

7.4

7.8

7.8

7.9

7.27

10-Yr US G-Sec

2.71

2.96

2.96

3.15

2.69

Spread in bps (10Yr Indian-10Yr US)

472

481

481

470

458

AAA Indian Corporate

7.93

8.05

8.74

8.89

8.55

AA Indian Corporate

8.51

8.17

9.21

9.36

8.93

Spread AAA to10 YR Indian bond

50

28

97

104

128

Credit/Deposit Ratio

74.46

74.84

74.53

76.75

77.6

 

Months

Deposit

Non Food Credit

 

Amount (Rs. Lakh Cr)

Growth YoY

Amount (Rs. Lakh Cr)

Growth YoY

Jan-18

109.42

4.56

72.54

9.52

Apr-18

113.81

7.73

75.80

10.68

Jul-18

115.30

8.66

76.28

10.55

Sep-18

118.00

8.08

79.77

11.31

Nov-18

119.60

10.8

80.93

13.75

Source: Acuité Research, RBI

Indices:

Months

NSE Index

Return

BSE Index

Return

Jan-18

11,027.70

4.72

35,965.02

5.6

Apr-18

10,739.35

6.19

35,160.36

6.65

Jul-18

11,356.50

5.99

37,606.58

6.16

Sep-18

10,930.45

-6.42

36,227.14

-6.26

Nov-18

10,876.75

4.72

36,194.30

5.09

Source: Acuité Research, CMIE

 

Our exciting journey started in 2005 with rating of bank borrowers most of whom were small and medium enterprises. At that time, credit rating was a concept known only to large issuers of capital market instruments. Since then, like a caterpillar transforms itself into a beautiful butterfly, we transformed to rate bonds, bank facilities of large corporates and issuers across industries. Along came many achievements - SEBI Registration in 2011, RBI accreditation in 2012, 50,000 ratings in 2018, 5,000 Bond and Bank Loan Ratings in 2017, launch of India's first Android and iPhone app to disseminate rating, tamper-proof QR-code-enabled rating rationales, and SMERA Terminal to name a few.

Now is the time to re-emphasize our increasing footprint across all segments of ratings through the launch of our new name - 'Acuité'.

The name has changed. The spirit of upholding highest standards of analytical rigour, continuous improvement, excellence in our processes and quest for innovation remains the same. We would like to re-emphasize that we will continue to work hard to provide independent, unbiased and timely opinion of highest standard.

Acuité means 'sharpness and clarity of thought and vision'. Let our research and ratings help you take decisions with confidence.


Sankar Chakraborti
CEO