The recent Monetary Policy Review saw Reserve Bank of India’s first rate hike in more than four years, a change in stance that saw 10 year benchmark G-sec yield almost touching the 8% mark for the first time in 3 years (since June 2015). The 10-year benchmark G-sec acts as a fair indicator of the investors’ sentiment of the Indian fixed income market. The benchmark yield has seen the steepest per year increase in yield in recent times with ~180 bps hardening since the trough of 6.18% achieved in November 2016.
Domestic debt market has been primarily dominated by Government securities. In FY17-18, the amount outstanding in Government securities reached Rs. 53.2 trillion representing a sizeable market share of ~65% in sovereign debt market (constituting G-secs, T-bills and State Development Loans) and ~45% in the entire Indian fixed income market. With an average ~30% share of secondary market trades in the Indian G-sec market, the ‘on-the-run’ 10-year benchmark G-sec represents the most liquid maturity segment of the G-Sec market.
The NIFTY 10-year Benchmark G-Sec Index captures the price change and accrued interest of on-the-run 10-year G-Sec. Additionally, NIFTY 10-year Benchmark G-Sec (Clean Price) Index captures only the price change of ‘on-the-run’ 10-year G-Sec.
Exhibit 1: Performance of NIFTY 10-year Benchmark G-sec index during various phases
*Data ended June 7, 2018
#Returns reported during Phase 3 are absolute returns for the 5 month period from August 2008 to December 2008.
Performance analysis of various phases of NIFTY 10-year Benchmark G-Sec Index
Exhibit 1 below depicts the 10 Year G-Sec yield and index values of the NIFTY 10-year Benchmark G-Sec (Clean price) Index. As observed, the NIFTY 10-year Benchmark G-Sec (Clean Price) Index depicts the standard inverse relationship between bond prices and yields. Additionally, the NIFTY 10-year Benchmark G-Sec Index tracks the total returns (TR) of ‘on-the-run’ 10-year G-Sec (including price change and accrual returns). With a sharp hardening of ~180 bps in yields during the recent Phase 6, both NIFTY 10-year Benchmark G-Sec (Clean price) Index and its TR variant delivered negative returns for the first time in all the 6 phases analyzed for the period between April 1998 (inception) and June 2018.
10-year benchmark G-sec yield, which is a fair indicator of the investor sentiment in domestic fixed income market, currently points at an interesting phase in the Indian economy in general and fixed income market in particular. On 6th June 2018, Reserve Bank of India announced its first rate increase in more than four years with 25 bps hike in repo rate. Multiple domestic and global factors such as inflation control, macroeconomic indicators, asset quality of banks, crude oil prices, US fed rate hike cycle, etc. seem to have driven the change in the stance of Monetary Policy Committee (MPC). Going forward, key factors such as domestic economic growth, RBI’s next policy decision and inflation levels are expected to play a major role in 10-year benchmark G-sec yield trajectory and might determine whether the yield hardens further, remains flat or softens from the psychological barrier of 8 per cent.
About the Author:
Mr. Shulin Satoskar, is currently the Deputy Manager, Products Development at NSE. He is a distinguished alum from TAPMI, Manipal, batch of 2014-16.