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Impact Of

Demonetization On
Indian Debt Market

Presented By:
Bhanuj Ahuja (05)
Parag Dhamija (11)
Taruna Juneja (17)
As demonetisation engulfs the economy and tales of woe hit people from
near and far, Indian financial markets bore the brunt of both the results
of the U.S. Presidential election as well as the crackdown on at least 80
per cent of currency notes in circulation.
Indian Debt Market

Debt market refers to the financial market where investors buy and sell
debt securities, mostly in the form of bonds.

An important source of funds, especially in a developing economy like

India. Indian debt market is one of the largest in Asia.

Like all other countries, debt market in India is also considered a useful
substitute to banking channels for finance
Classification of Indian Debt Market
Indian debt
Government Securities Market (G-Sec Market): It consists of central
and state government securities. It means that, loans are being taken by
the central and state government. It is also the most dominant category
in the Indian debt market.

Bond Market: It consists of Financial Institutions bonds, Corporate bonds

& debentures and Public Sector Units bonds. These bonds are issued to
meet financial requirements at a fixed cost and hence remove
uncertainty in financial costs.
The key role of the debt
markets in the Indian Economy
Efficient mobilization and allocation of resources in the economy

Financing the development activities of the Government

Transmitting signals for implementation of the monetary policy

Facilitating liquidity management in tune with overall short term and

long term objectives.
Impact of Demonetization

Improves Liquidity in Banking System

Reduced financing cost for Indian firms

Increase in Bond Price

Lower Bond Yield

FPI & FII Pullouts

Liquidity Boost
The total liquidity in the banking system due to deposit of Rs 500 and
Rs.1,000 currency notes post demonetisation was Rs 11.55 lakh crore.
Net Demand and Time Liability (NDTL) goes up, and Banks have to
abide by the 20.75% of SLR as per regulation which is a mandatory
As NDTL moves higher, so much buying will happen in the Government
security market.
The RBI does not have enough securities to absorb this type of
inflows. The total of government securities which the RBI holds on its
balance sheet is ~Rs.7.50 lakh crore, which can be tendered to
borrow the surplus liquidity of the banking system.
STEPS TAKEN BY RBI To absorb Liquidity

RBI had directed banks to keep 100% CRR of the deposits mobilised
during the period from September 16, 2016 to November 11, 2016. This
is expected to absorb liquidity to the extent of Rs.3.25 lakh crore from
the banking system.

Maintaining excess CRR is akin to penalizing the banking system and not
allowing transmission of lower rates into the economy.

To mitigate this risk, the government has increased the market

stabilisation bonds limits from Rs.30,000 crore to Rs.6,00,000 crore.
Reduced financing cost for Indian

Rupee corporate bonds had their best month in more than three years
in November.

The drop in bond yields help companies refinance debt, fund capex and
make acquisitions at a cheaper rate.

Companies can now raise funds in the local bond market at cheaper
costs, after the demonetisation sparked a flood of money into banks
that have ploughed it into debt securities

Firms from billionaire Kumar Mangalam Birlas cement unit to the

nations largest power producer have sold bonds at less than 7 % for the
first time since 2010.
Reduced financing cost for Indian
firms contd..

Indian businesses have borrowed a record 3.96 trillion rupees from

the bond market so far in 2016.

The momentum of higher issuance is likely to continue even next

year as bonds offer companies better rates over bank loans

Andhra Pradesh Capital Region Development Authority plans to raise

20 billion rupees via bonds to fund the development of a new centre
of government for the south-eastern state.
Impact on Bond Yield & Prices
Banks have started buying government securities aggressively, resulting
in a sudden rise in bond prices. The benchmark 10 year bond yield came
down to 6.43%.
Theyieldon 3-month bonds have also crashed from 6.40% on 8
November to just 5.94% now.
Debt mutual funds holding long-term bonds have shot up 2.8% in the
past 10 days since the announcement. This category normally earns in
3-4 months. Some long-term gilt funds rose more than 3% absolute
returns during this period.

The average yield for three-year AAA corporate notes in India

slumped 45 basis points in November, the biggest monthly decline
since 2013.

The Bloomberg Barclays Global Aggregate Total Return Index of

bonds fell 4 percent in November, the worst slump since the gauges
inception in 1990.

The rally in government securities saw the 10-year G-securities

outperforming the other segment of the yield curve.

The spread between 10-year and 28-year paper widened from 45

basis points to 53 basis points.

The spread between G-Sec and AAA PSU Bonds widened from 75 basis
points to 80 basis points.

Most market participants switched from long-dated papers to the

most liquid papers in the 10-year segment.

The demand for government securities is concentrated in the short

to medium segment papers. The 10-year AAA private corporate bond
spread widened from 90 basis points to 100 basis points.
FPI Pullout

Indian capital markets seem to be losing their 'safe haven'

status among foreign portfolio investors as they appear
headed for nearly USD 2-billion pullout of the so-called 'hot
money' 2016.
It is the debt instruments that are taking the biggest hit,
after remaining a preferred investment avenue for foreign
funds in recent years
Net withdrawal by FPIs from debt markets stood at Rs
17,392 crore in December.
This year so far, FPIs have invested a net sum of Rs 28,881
crore in stocks while they pulled out Rs 42,101 crore from
the debt market,
FPI Pullout Contd.
Massive pullout of FPI investment, in debt, happened during the last
two months because of
The near-term impact on corporate earnings, and economic growth from
demonetisation drive, which created domestic cash crunch, sparked
intense selling pressure in the capital markets
Impact of GST on companys cash flows
Dollar strengthened
Expectations of rate hike by the US Federal Reserve
The surprising US presidential outcome

The overall net outflow has made 2016 the worst year for Indian
capital markets in terms of overseas investment since 2008, when
FPIs had pulled out a massive Rs 41,215 crore in the wake of the
global financial crisis.
FII Pullout

Emerging market currencies depreciated against the USD in

November 2016. The emerging market currency index declined
by 2.5% in November, with the Mexican Peso depreciating by 7%
during the month. Most of the losses occurred on the day of the
U.S. election results.
The Chinese currency and the Indian currency depreciated by
FII outflows from the Indian market were USD 5.77 billion, with
USD 2.68 billion in equity and USD 3.09 billion in debt.
The outflows are expected to continue in the coming months as
interest rates increase in the USA.
Rally in Indian bonds is Not over Yet
Some big investors are still gung-ho
on EM debt

A stronger dollar, rising interest rates and the prospect of a drop in

global trade arent enough to deter some of the worlds biggest asset
managers from buying emerging-market bonds.
Reasons for their optimism range from the conventional such as
Less Political risk.
Yields Hunt
Improving Fundamentals
Under-Invested Funds
Factors Explained
Less Political Risk
With elections in France and Germany, the inauguration of Donald
Trump and Britain potentially giving notice to exit the EU, 2017 has
no shortage of global headwinds. Money fleeing heightened political
risk in developed countries may find a home in developing nations as
it did during the European debt crisis in 2010-2012.

Yield Hunt
Yields on emerging-market dollar bonds have climbed for four
straight weeks since Donald Trumps election victory & increase in
interest rates make emerging markets more lucrative.
Emerging-market bonds, yielding more than 5 per cent on average,
are starting to look attractive again
Factors Explained Contd..
Improving Fundamentals
Emerging-market fundamentals are in much better shape now than they
were three years ago. Economic growth is picking up this year for the
first time since 2010, current-account shortfalls in countries like India
and South Africa have receded and foreign reserves have increased.
In general emerging markets have stronger current-account balances
and a lower reliance on external debt, rendering them less risky.

Under-Invested Funds
Some of the worlds biggest money managers still have a lot of room to
increase their exposure to emerging-market bonds.
What Should Bond Investor Do???
For the debt component of the portfolio, we advise investors to increase their
allocation to long-term funds from 33% to 50%," says Vishal Dhawan, chief financial
planner, Plan Ahead Wealth Advisors.
Aggressive fixed income investors could invest in dynamic bond funds, income funds
and gilt funds, which will benefit from falling rates (or yields). Funds that invest in
long-term government securities look to benefit from the rise in bond prices.