December 31, 2020

Debt Market Yearbook - 2020

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 December 31, 2020

Key events in the Year 2020

RBI doubles FPIs debt investment limit: Jan 23
RBI revised the Voluntary Retention Route (VRR) scheme for investment by Foreign Portfolio Investors
(FPIs) to include increase in the investment limit from Rs 75,000 crores to Rs. 1.5 lakh crores. Also,
investment limit available for fresh allotment would be Rs 90,630 crores, minimum retention period
would be 3 years and investment limits would be available on tap and allotted on first come, first served
basis. RBI increased the short-term investment limit for FPIs in either Central Government Securities or
State Development Loans from 20% to 30% of that FPIs total investment and also increased the short-
term investment limit in corporate bonds from 20% to 30% of that FPIs total investment.
Union Budget 2020-21: Feb 1
Finance Minister Nirmala Sitharaman presented a fiscally prudent budget for FY2020-21 where-in the
fiscal deficit target for FY21 was revised from 3.0% to 3.5% of GDP providing adequate space for counter-
cyclical fiscal measures taken for boosting investments and in line with the objectives of the FRBM Act.
The government also raised the FPI limit for corporate bonds to 15% from the existing 9%. Withholding
rate reduced from 5% to 4% on interest payment on the bonds listed on its IFSC exchange. The govt.
announced 100% tax exemption to the FPI interest, dividend and capital gains income in respect of
investment made in infrastructure. The govt. also proposed the removal of Dividend Distribution Tax and
the dividend is now to be taxed in the hand of investor.
RBI modified existing liquidity mgmt. framework, introduced LTROs for the first time: Feb 6
RBI withdrew the daily fixed rate repo and four 14-day term repos being conducted at present. It
introduced a 14-day reverse repo operation at a variable rate to be conducted to coincide with the CRR
maintenance cycle which would be the main tool for managing frictional liquidity requirements. Also, the
RBI introduced long term repo operations (LTROs) of 1-year and 3-year tenors for a total amount of Rs
1,00,000 crore for the first time in order to improve monetary policy transmission.
RBI links all new floating rate loans to MSMEs to external benchmarks: Feb 26
The RBI decided that all new floating rate loans to the Medium Enterprises extended by banks from April
01, 2020 shall be linked to the external benchmarks. Floating rate loans were already linked with
external benchmarks for micro and small enterprises & have now been extended to medium enterprises.
RBI repo rate, T-bill, and other market interest rates published by the FBIL are among the benchmarks.
Oil crashes by most since 1991 as Saudi Arabia launched price war: Mar 9
Oil prices suffered an historic collapse after Saudi Arabia shocked the market by launching a price war
against Russia. Russia refused to go along with OPEC's efforts to rescue the coronavirus-battered oil
market by cutting production. But then Saudi Arabia escalated the situation further as it slashed its
April official selling prices by $6 to $8, in a bid to retake market share and heap pressure on Russia.
US oil prices crashed as much as 27% to a four-year low of $30 a barrel on 9th March, 2020.
U.S. 10-year Treasury yield falls to new all-time low at 0.3% as flight to bonds continues: Mar 9
The global flight to the safety of government debt continued as investors piled into U.S. Treasury and sent
the yield on the 10-year note to record lows. The yield on the benchmark 10-year Treasury sank to low of
0.318%.The plunge in yields came amid an exodus from stocks as disruptions to businesses on the back
of the coronavirus outbreak heightened fears of a global slowdown while the crash in oil prices dragged
yields further down towards the zero mark.

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 December 31, 2020

AT1 bond yield witness spike after Yes Bank fiasco: Mar 12
Additional tier 1 (AT1) bonds were in the news after the RBI came out with a scheme of reconstruction
for Yes Bank where it said that the instruments qualifying as AT1 capital issued by Yes Bank under Basel
III framework, shall stand written down permanently. Yes Bank had issued such bonds worth over Rs
8,000 crore and RBI exercised a clause no one thought they would. This led to huge uncertainty over the
bonds which were generally considered to be superior to equities & led to elevated yields for similar
instruments with other banks.
Govt. announces lockdown measures for COVID-19 pandemic: Mar 24
Prime Minister Narendra Modi announced nationwide lockdown in the wake of increasing cases of novel
coronavirus for 21 days to prevent the further spread of COVID-19. Essential services were exempted
from the lockdown. Prime Minister Narendra Modi also announced a central allocation of Rs 15,000 crore
to strengthen the health infrastructure to tackle the disease.
RBI announced rate cut by 75 bps to 4.4%, various measures to maintain surplus liquidity: Mar 27
In view of the COVID-19 pandemic, the RBI MPC advanced its meeting & reduced the policy repo rate by
75 bps to 4.40% from 5.15% with immediate effect. In addition, the RBI cut the Cash Reserve Ratio (CRR)
by 100 bps from 4% to 3% of NTDL with effect from March 28, 2020, making it available for a period of
one year ending on March 26, 2021. RBI also announced auctions of Targeted long term repo operation
(TLTRO) of 3-year tenure upto Rs 1 lakh crore at floating rate linked to policy rate. Further, RBI raised
Marginal Standing Facility(MSF) from 2% to 3% of SLR with immediate effect upto June 30, 2020. These
three measures were estimated to result in total liquidity injection of Rs 3.74 lakh crore to the system.
RBI announced moratorium on loan payments: Mar 27
RBI permitted all commercial banks, cooperative banks, all-India Financial Institutions, and NBFCs allow
a moratorium of 3 months on payment of instalments in respect of all term loans outstanding as on
March 1, 2020. In respect of working capital facilities sanctioned in the form of cash credit/overdraft,
lending institutions were being permitted to allow a deferment of 3 months on payment of interest in
respect of all such facilities outstanding as on March 1, 2020.
FM announced Rs 1.70 lakh crore package under PM Garib Kalyan Yojna: Mar 27
FM Nirmala Sitharaman announced a package of Rs 1.70 lakh crore under the PM Garib Kalyan Yojna,
directed at bringing relief to the urban and rural poor, migrant workers and women in the bottom rung of
the socio-economic strata. The stimulus includes food subsidies worth Rs 45,000 crore, direct cash
transfers, packages for women and other workers as well as EPFO subscribers.
RBI hiked FPI limit in Corporate Bonds 15% for FY21: Mar 30
RBI hiked the limit for FPI investment in corporate bonds to 15% of the outstanding stock for FY21. With
the enhanced limit, FPIs can hold Rs 4.29 lakh crore of corporate bonds for the half year ending Sep'20,
and Rs 5.41 lakh crore for the half year ending Mar'21. However, the limits for FPI investment in G-secs
and SDLs remained unchanged at 6% and 2%, respectively, of outstanding stocks of securities for FY21.
RBI announced Special Liquidity Facility for Mutual Funds worth Rs 50,000 crore: Apr 27
On account of liquidity strains on MFs causing redemption pressure of a few funds & related to closure
of some debt MFs, the RBI announced a Special Liquidity Facility for Mutual Funds (SLF-MF) worth Rs
50,000 crore under which RBI would conduct repo operations of 90 days tenor at the fixed repo rate.

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 December 31, 2020

The liquidity support availed by banks under the SLF-MF would be eligible to be classified as held to
maturity (HTM) even in excess of 25% of total investment permitted to be included in the HTM portfolio.
GoI raised FY21 gross borrowing to Rs 12 lakh crore: May 8
The government revised its borrowing programme for FY21 raising it by more than 50% from Rs 78 lakh
crore as per budget to Rs 12 lakh crore. The borrowing for H1 FY21 was raised to Rs 6.98 lakh crore,
close to 58% of the total borrowing target for FY21. The government also raised the weekly auction of its
dated securities from Rs 19,000-21,000 crore to Rs 30,000 crore.
Atmanirbhar Bharat Abhiyan Package 1.0: May 14 - May 18
Union Finance Minister announced a Rs 20 Lakh Crore Package to provide relief to the economy in the
backdrop of global pandemic and nation-wide lockdown. Of the relief measures, State borrowing was
increased from 3% to 5% of State Gross Domestic Product. MSME sector was given collateral-free
loans of Rs 3 lakh crore, Rs 50000 Crore worth of equity infusion in growth potential companies, and
tenders up to Rs 200 crore to not have foreign participation. EPF contributions were reduced from
12% to 10% for both employees and employers. NBFCs, HFCs and MFIs were provided liquidity of Rs
30000 crore through investment in Investment-Grade debt papers. Rs 45000 crore Partial Credit
Guarantee Scheme was announced for lower credit rated companies. DISCOMs received Rs 90000
crore against their receivables.
Moody’s cut India’s rating to lowest investment grade with negative outlook: Jun 2
Moody’s Investors Service downgraded India’s credit rating to lowest investment grade. It cited a
prolonged period of slow growth, rising debt and persistent stress in parts of the financial system. It
said the cut to Baa3 from Baa2 was not driven directly by the impact of the coronavirus but that the
pandemic had amplified vulnerabilities in India’s credit profile that were present and building prior to
the shock. Moody’s maintained a negative outlook for the new sovereign rating, citing worsening
government finances as the pandemic continues to hurt the economy.
The ECB increased its crisis bond-buying program & maintained interest rate levels: Jun 4
The European Central Bank (ECB) increased its crisis bond buying program by 600 billion euros
($672billion). It also extended the schemes duration until June 2021, or until the bank believes the
crisis is over. In addition, the central bank pledged to buy up to 1.35 trillion euros worth of debt
through June 2021 under its Pandemic Emergency Purchase Programme.
SEBI allows transactions in defaulted debt securities: Jun 23
In a bid to mitigate economic distress faced by bond issuers in wake of COVID-19 pandemic, SEBI
allowed transactions in defaulted debt securities and put in place operational framework for such
transactions. The move was made to help bond holders to find a market for defaulting debt.
Union cabinet brings all Co-op Banks under the RBI: Jun 24
The Union Cabinet decided to bring all co-operative banks under the RBI through an ordinance.
Government banks, including 1,482 urban cooperative banks and 58 multi-state cooperative banks,
are now being brought under supervisory powers of RBI.
The RBI revised the norms for the Priority Sector Lending (PSL): Sep 4
The RBI revised the norms for the Priority Sector Lending (PSL) to support start-ups and the
renewable energy sector. Loans up to Rs 50 crore for start-ups would be treated as PSL exposure for
banks. For health infrastructure, including entities working under the govt's 'Ayushman Bharat'
scheme, the lending was doubled to Rs 10 crore.

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 December 31, 2020

RBI announced OMOs in State Development Loans (SDLs) for the first time: Oct 9
In order to improve liquidity & facilitate efficient pricing, the RBI decided to conduct Open Market
Operations (OMOs) in SDLs as a special case during FY2020-21. The OMOs were to be conducted for a
basket of SDLs comprising securities issued by states.
Atmanirbhar Bharat Abhiyan Package 2.0: Oct 12
Union Finance Minister announced a package worth Rs 73000 crore. Additional budget of Rs 25000 crore
was provided for Capital Expenditure over and above Budget 2020. States were provided with Special
Interest Free 50-Year loans of Rs 12000 crore.
Centre announced additional borrowing of Rs 1.1 lakh crore on behalf of states to meet GST
shortfall: Oct 15
The Finance Ministry announced that the Central government will borrow up to Rs 1.1 lakh crore on
behalf of the states to bridge the shortfall in GST collections after a slowdown in the economy since
last fiscal resulted in a drop in the Goods and Services Tax (GST) collections, upsetting the budgets of
states which had given up their right to levy local taxes such as sales tax or VAT when GST was
introduced in July 2017.
Atmanirbhar Bharat Abhiyan Package 3.0: Nov 12
Union Finance Minister announced package worth Rs 2.65 lakh crore. Of this, Rs 1.45 lakh crore was
allocated to give a boost to manufacturing, followed by Rs 65,000 crore for agriculture (fertiliser
subsidy), and Rs 10,200 crore for industrial infrastructure, incentives and domestic defense equipment.
With the 3rd package, the total expenditure through Atmanirbhar Bharat relief came to Rs 29.87 lakh
crore – 15% of National GDP. Also, The Union Cabinet approved equity infusion of Rs 6,000 crore in NIIF
Debt Platform sponsored by National Investment and Infrastructure Fund.
Lucknow became the first city under AMRUT to raise funds via municipal bonds: Nov 14
In Nov’2020, Lucknow became the ninth city in India to have raised municipal bonds and the first city
to issue such a bond after the launch of AMRUT scheme. In India, only 1 % of urban level bodies
(ULBs) financial needs are met through municipal bonds as opposed to 10 % in the US. Uttar Pradesh
CM Yogi Adityanath was the chief guest at the bond’s listing on the BSE on Dec 2.
RBI extends On Tap TLTRO to 26 Sectors and Synergy with ECLGS 2.0: Dec 4
The RBI, in its Dec’20 MPC announced that in addition to the five sectors announced under the
Emergency Credit Line Guarantee Scheme 2.0 (ECLGS 2.0), it was proposed to bring 26 stressed
sectors within the ambit of sectors eligible under on tap TLTRO. Banks were encouraged to synergise
the two schemes by availing funds from RBI under on tap TLTRO and seek guarantee under ECLGS 2.0
to provide credit support to stressed sectors. Investments made by banks under this facility would be
classified as held to maturity (HTM) even above the 25% of total investment permitted to be included
in the HTM portfolio.
Data showed Sovereign wealth funds deployed capital worth USD 14.8 bn in India so far in
2020: Dec 10
According to data by New York-based Global SWF, which tracks over 400 sovereign wealth funds,
sovereign wealth funds have deployed capital worth a record USD 14.8 bn in India so far in 2020,
nearly three times more than what they have put in China (USD 4.5 bn).

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 December 31, 2020

Macro-economic parameters in 2020

RBI Monetary Policy
The Monetary Policy Committee cut the repo rate by 115 basis points from 5.15% to 4.00% early in the
year to combat the adverse effects of Covid-19 pandemic on the economy. The RBI linked all new
floating rate loans, provided to MSMEs by banks, to external benchmarks in order to improve
transmission of rate cuts. The RBI allowed moratorium on term loans and deferment of interest on
working capital facilities in order for companies to ride through the lockdown phase.
Additionally, the RBI introduced various liquidity measures for all market participants through CRR
cuts, targeted LTROs, OMOs etc. to maintain surplus liquidity in the system. In the final policy of the
year, the MPC stressed its accommodative stance to support revival of growth while ensuring
inflation remains within target. Overall, the RBI remained upbeat about the future growth prospects
for the economy, revising GDP growth estimates upwards for Q3 and Q4 of FY21 amid flattening Covid-
19 cases.
FOMC Monetary Policy
Federal Reserve dropped the fed funds rate from 1.50% - 1.75% at the start of the year to 0% - 0.25%
and maintained its accommodative stance in its final meeting in Dec’20 in order to combat the Covid-
19 pandemic’s adverse effects on the economy. The Fed initially launched a massive USD 700 bn
quantitative easing (QE) program in March to shelter the economy from the effects of the virus. Later,
the program was extended indefinitely to include asset purchases worth $120 bn of Treasuries
and mortgage-backed securities every month. The Fed has indicated it is likely to keep interest
rates at these levels until inflation attains a long term average of 2% and maximum employment and
price stability is achieved in the US economy.
Liquidity:
RBI has infused liquidity through Targeted Liquidity
9.00
LTROs, OMOs and CRR cut through the
Liqudity (Rs lakh crore)

year. RBI introduced long term repo

7.25
operations (LTROs) at the start of the year
to smoothen the yield curve and improve
5.50
transmission of rate cuts done in the
previous year. RBI fine-tuned its liquidity
3.75
management framework by withdrawing
the daily fixed rate repo and four 14-day
2.00
term repos and replacing with a 14-day
reverse repo operation at a variable rate
that coincided with the CRR maintenance
cycle.
Bloomberg Banking System Liquidity Index
Further, at the onset of the pandemic in
March, RBI conducted special liquidity operations through OMOs, USD/INR buy/sell swaps and
Targeted LTROs to address any additional demand for liquidity & to provide flexibility to the
banking system. Additionally, RBI’s CRR cut from 4% to 3% and increase in Marginal Standing
Facility(MSF) from 2% to 3% ensured that liquidity has been abundant with an average of around Rs 5
lakh crore of surplus liquidity being witnessed almost on a daily basis in the reverse repo

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 December 31, 2020

operations. The repo rate was also brought down from 5.15% to 4%. Over 12 months the MCLR came
down from a range of 7.65-8% to 6.55-7.10%. Consequently, the 10- year yield G-Sec yield came down
from 6.74% as at end-December 2019 to 5.85-5.90% by end of December. Hence there has been a
decline of almost 80 bps which has helped the government in its additional borrowing requirements.
GDP Growth:
India started the calendar year by
recording the slowest GDP growth rate in GVA GDP
11.0%
six years and ended it by entering a
technical recession. 6.2% 5.6% 5.7%
5.2% 4.4%
6.0% 4.1%
3.1%
The calendar year 2020 started on a rather
weak note as India’s GDP grew by 3.1% in 1.0%
Q4 FY20, the slowest pace of growth under Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
the new series (base year 2011-12) and -4.0% FY'19 FY'19 FY'19 FY'20 FY'20 FY'20 FY'20 FY'21 FY'21
then progressively decelerated further. Hit
by the lockdown that stalled economic -9.0% -7.5%
activity for most part of the quarter on top
of 2 years of subdued growth, GDP data in -14.0%
the first quarter of the current financial
year shrunk to the lowest level on record. -19.0%
Real GDP growth was -23.9% in Q1 2020-
21 making India one of the worst-hit major -24.0% -23.9%
economies in the world.
However India’s GDP staged a resilient V-shaped recovery in Q2:2020-21 suggesting that the
resumption of economic activity has been gathering pace. India’s GDP beat economists’ estimates
and contracted by just -7.5 % YoY in Q2, a sharp rebound from the lockdown-induced decline of (-)23.9
percent in Q1.
In Q3:2020-21, high frequency indicators point to a recovery gaining traction, with double digit
growth in passenger vehicles and motorcycle sales, railway freight traffic, and electricity consumption
in October, although there was moderation in some of these indicators in November. The First
Advance Estimates for the GDP growth in 2020-21 will be released on January 7th and they will
provide the closest approximation of GDP before the Budget is presented on February 1st in 2021.
Retail Inflation:
Retail inflation maintained its upward 8.0% CPI Core CPI
momentum coming into 2020, clocking over
RBI’s upper target of 6% during the first two 7.0%
months of the year. Just when it seemed that
inflation was falling back into the RBI’s target 6.0%
range in March, the nation-wide lockdown on
account of Covid-19 pandemic pushed the 5.0%
inflation back upwards over 6% for the rest
4.0%
of the year.
The primary cause of high inflation has 3.0%
been soaring food prices, which averaged

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 December 31, 2020

around 9% during the year, on account of sporadic lockdowns in various parts of the country. Seasonal
price variations on vegetables and excessive monsoon were also responsible for keeping the food
prices at high levels. At the same time, core inflation was also persistent, averaging over 5%, in 2020.
The primary drivers of core inflation were prices on health, transport and personal effects. However,
inflation is displaying signs of reversal towards the end of the year and is also being aided by a
high base effect.
Fiscal position of central government:
During the first 7 months of FY21, the finances of the central government clearly depict the
coronavirus pandemic induced stress though partial improvement has been witnessed on a sequential
basis. During Apr–Oct 2020, the fiscal deficit of the central government reached 119.7% of the
budgeted estimate (Rs. 7.7 lakh crore) at Rs. 9.53 lakh crore. Taking into consideration revised
gross borrowing plan to Rs. 13.1 lakh crore, the fiscal deficit continues to be within the target.
Total receipts have declined by 24.2%.
Announced Fiscal Fiscal
Notably, the capital expenditure is 1.9% Package Stimulus Deficit
lower than the same period of last year Particulars (Rs lakh (Rs lakh as % of
and is only 48% of the budget estimate. crore) crore) GDP
Financing of the fiscal deficit is mainly Budgeted market borrowing for
by way of market borrowings. 7.80 7.96 3.96%
FY21
Additional Borrowing for FY21
Although the finances of the central 4.20 4.20 2.09%
government have Atmanirbhar Bharat 1.0
improved 20.00 1.50 0.75%
Atmanirbhar Bharat 2.0
sequentially, the receipts of the central 0.73 0.45 0.22%
government could see only gradual Additional Borrowing for GST
1.10 0.00 0.00%
improvement. Compensation
Atmanirbhar Bharat 3.0 2.65 1.19 0.59%
The govt’s borrowing programme was
Total 15.30 7.60%
to be Rs 7.8 lakh crore for the year
which was revised to Rs 12 lakh crore due to the pandemic measures. Subsequently the programme
was enhanced to Rs 13.1 lakh crore to take care of the states’ compensation on account of GST. So far
borrowings have amounted to Rs 10.5 lakh crore. The higher expenditure incurred and lower revenues
have led the government to resort to additional market borrowing to meet the fiscal deficit.
Fiscal impact of the measures taken by the govt to boost the economy amidst the COVID-19
pandemic coupled with additional market borrowing are expected to widen the fiscal deficit for
FY21 to more than 7%. Despite government’s relief measures on account of Covid-19 pandemic, the
fiscal stimulus has not been perceived by the market to have a substantial upward impact on the fiscal
deficit.
Rupee:
The Rupee displayed a fair level of stability in 2020 for a pandemic year. Although there was
considerable depreciation from pre-pandemic levels of 72/$ to around 77/$ in April at the height of
the lockdown, the Rupee has since stabilized and appreciated to 73/$ levels at the end of the year.
Rupee opened the year at 71.22/$ and maintained the preceding year’s stability and stayed between
70.72/$ and 72.17/$. Come March, the Covid-19 pandemic resulted in a complete lockdown in India
and globally. Major halt of economic activity during the initial lockdown coupled with global flight to
safety resulted in massive FII outflows in March and April, leaving the rupee to depreciate to as low

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 December 31, 2020

as 76.97/$ on April 21, 2020. Rupee traded at its lowest in April at a monthly average of 76.23/$.
However, the depreciation in the rupee was capped by falling crude oil prices. As trade deficit turned
into surplus induced primarily by lockdowns across the globe, the current account also
reversed into surplus mode. The fortunes of the Rupee reversed course and the Rupee started
to stabilize. With record FII inflows towards the end of the year and with RBI piling on forex reserves
to new highs at $578.57 billion in Dec’20 from $454.95 billion at the end of 2019, the Rupee
appreciated towards the 73/$ levels. Overall, the Rupee depreciated by 3.23% from 71.22/$ to
73.20/$ in 2020.

Rupee Movement Forex Reserves ($bn)

600
76
550
74
500
72
450
70

Forex Reserves
USD/INR

FII investment:
After witnessing consistent inflows in 2019, the Monthly FPI/FII Net Investments (Calendar Year -
Indian capital markets saw record capital flows in 2020)
2020. The onset of Covid-19 pandemic brought about INR crores
Calendar
record outflows from both the equity and the debt Year Equity Debt Hybrid Total
markets. March witnessed over 60,000 crore in
January 12123 -11648 -46 957
outflows each on the equity and the debt side.
February 1820 2097 2416 8970
Period of March-May saw outflow of funds on account
March -61973 -60376 -19 -118203
of pandemic fears and global flight to safety to the tune
April -6884 -12552 544 -14859
of Rs 1.4 lakh crore. June saw the end of strict
lockdown norms which resulted in huge inflows into May 14569 -22935 11 -7356
the equity market to the tune of Rs 21,832 crore. June 21832 -1545 1957 26009
Another fall was observed in the month of September, July 7563 -2476 1 3301
when Covid-19 cases showed a continuous rise, geo- August 47080 -3310 3347 49879
political tensions with China, concerns regarding September -7783 3958 2222 -1196
India’s economic growth and fresh lockdowns
October 19541 1641 -207 21826
following rising Covid-19 cases led to outflows.
However, the month of October and November saw November 60358 -1806 -169 62782

record equity inflows on account of better-than- December 48858 5360 152 55133
expected quarterly results of companies and Total -
157104 -103592 10209 87243
2020
easing of new covid-19 cases.

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 December 31, 2020

The net inflows in the capital markets were Rs 87,243 crore, of which equities saw record inflow of Rs
1.57 lakh crore while the debt segment saw outflow to the tune of Rs 1.03 lakh crore.
Crude Prices:
Coming from volatility in the preceding years
70
in crude prices brought upon by US-China
tensions, supply cut and weak global cues,

Prices ($/bbl)
60
2020 saw a massive fall in prices on account
of subdued demand due to implementation of 50
lockdowns in large parts of the world. Crude
prices opened at 60.53 $/bbl and recorded a 40
high of 62.11 $/bbl. This was followed by a
steep fall in price to 32.48 $/bbl in March 30
on account of steep decline in demand for
crude owing to lockdown on account of
Covid-19 and worsened by Saudi Arabia’s Brent Crude
price war against Russia.
As the pandemic situation improved after June, global prices have slowly and steadily risen to the
present 51.33 $/bbl level as economic activities and travel restrictions were eased out, resulting
in increasing demand. Going forward, prices are likely to depend on the progress of Covid-19, and
future is highly reliant on geo-political situations and vaccine developments.
India Bond Market
The 10-Year G-Sec yields have largely maintained a downward trajectory in the wake of RBI rate cuts
and its efforts to keep the cost of borrowing at subdued levels. The 10-Year yields declined from a high
of around 6.67% in Jan’20 to 6.03% in Mar’20 after US Fed cut rates to zero at the onset of Covid-19
pandemic. Although yields bounced back upwards a couple of times on RBI’s devolvement and
expectations of higher supply, concerns of inflation and huge fiscal deficit, the spurts turned out to be
temporary. RBI’s liquidity measures and artificial suppression through OMOs have maintained
the yields at slightly lower than the 6% levels. On the other hand, yields at the shorter end of the
curve have continuously declined with the cut in reverse repo rate, which is currently at 3.35%. As a
result, 2020 has experienced sharp steepening of the yield curve with the spread between 3-
Month T-Bill and 10-Year G-Sec widening to 230 bps in 2020 from 114 bps in 2019.

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 December 31, 2020

Bond Market Outlook

2020 has been an extraordinary year on account of a rare event in the form of the Covid-19 pandemic
and has therefore warranted an extraordinary response from the Central Banks worldwide. Like other
Central Banks, RBI has also exercised rate cuts and maintained an accommodative stance going into
2021.
Although inflation has shown signs of cooling off, it is expected to be a key monitorable as demand and
growth recover post lockdown. Therefore, a rate cut by RBI seems highly unlikely in this scenario.

For the first half of 2021, we expect the yields to remain anchored around the 6% levels as
liquidity remains in surplus and inflation receives support from a high base.

However, as GDP growth gathers pace in the second half of 2021, we expect surplus liquidity will
be absorbed by growth on the credit side and may lead to pick-up in inflation. The RBI may have to
revisit its accommodative stance on rates and rate cycle may begin to turnaround. In this
scenario, the bond yields are likely to start moving upwards of 6% from the second half of 2021
onwards.

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