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:

Source: Acuité Research, RBI

Indices:

Source: Acuité Research, CMIE