Rate cuts, accommodative stance and easy liquidity have not filtered into the credit markets with spreads for all issuers except for select PSU and private issuers at highly elevated levels. The starkly visible economic slowdown, as highlighted in the policy provides no relief to stressed credit markets. Click here for Credit Market Data.
RBI has come with with more measures for NBFC relief, by increasing single borrower limits for bank lending to NBFC’s from 15% to 20% of tier 1 capital. However, this is unlikely to benefit most NBFCs except the select few that are not stressed.
It will take a while for credit stress to ease as the process is long. Demand conditions have to pick up, risk aversion should fall and NPA growth should ease. RBI can only influence monetary conditions and not credit conditions.
RBI threw a mild surprise with a 35bps rate cut in its policy today, while markets were expecting a 25bps rate cut. The OIS market though is factoring in another 25bps – 35bps rate cut, with one and five year OIS yields trading at below 5.3% levels while the Repo Rate is at 5.40% post the 35bps rate cut.
10 year benchmark bond the 7.26% 2029 bond saw yields largely unchanged at around 6.33% levels. The INR has weakened on a weak Yuan (Read our note, Yuan at 7, what does it mean for INR). Sensex and Nifty are moving more on global risk aversion and domestic earnings weakness. This trend should continue going forward until global risk aversion eases and domestic earnings start to improve.
Credit spreads can fall for PSU bonds and select private sector bonds as markets search for yields but for all other issuers, spreads will stay elevated or even rise.
RBI highlighted growth concerns in the economy with external demand coming off on trade wars and geo-politics while domestic demand has come off on weak consumer sentiments. The domestic economy is a worry for the RBI and government given sharp slowdown seen in key sectors like Auto, Infrastructure and Real Estate. RBI has made growth a priority in the policy. Inflation is largely in line with expectations and despite a seasonal rise in food inflation, the weak demand scenario is keeping down core inflation.
Global economies are slowing and bond yields are sharply down in US and Eurozone. Fed and ECB are dovish and have promised more accommodation. Read our Global Currency and Bond Market Analysis for details.