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Debt Market Outlook - December, 2011
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| Global economies are currently going through a recalibration of growth expectations and global growth may moderate in 2012. The European debt situation is still a matter of concern. The U.S. economy is expected to show slow and uneven expansion. Governments no longer enjoy the freedom they had in the credit crisis period to undertake growth boosting stimulus measures. The Middle East risks, which are still underpriced by the market, could create commodity price volatility, adding uncertainty to the inflation outlook. In this adverse macro landscape, we believe that more domestically oriented economies will be more resilient in the medium term. |
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| The Indian economy faces significant headwinds that could result in a deceleration in growth. Increased fiscal constraints, high inflation, the government's policy paralysis and the impact of monetary tightening will take a toll on domestic growth. |
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| Inflation has remained stubbornly high in India due to structurally high primary product inflation. Rising incomes, higher rural wages because of higher support prices of agricultural crops, a deteriorating fiscal situation and the depreciation of the rupee have all been responsible for high inflation. However, there are now signs that inflation will soften. Headline WPI inflation in November eased to 9.1% y-o-y from 9.7% in October. We expect WPI inflation to moderate to around 8% in December and to below 7% by March 2012. |
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| In response to high inflation, the RBI has raised rates 13 times so far (effective tightening at 525bps). In its latest policy, it has stated that "the likelihood of (further) rate action is relatively low". We thus expect the RBI to begin its easing cycle soon and lower cash reserve ratio (CRR) requirements in the next four months. Once it sees a substantial drop in both headline and core inflation, RBI may begin to drop interest rates. We also expect RBI to infuse liquidity by doing more (OMO) buy back of securities. |
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| Debt Outlook |
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| The yield in G-Sec market is expected to be ~ 8.20/8.40%, given the positive sentiment after the buyback of securities. Corporate bonds will again track G-Sec with a spread of ~ 75 bps. |
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