Coffee Can Newsletter – November, 2018

In the previous newsletter (https://bit.ly/2qoiaiN), we had highlighted rising interest rates as one of the reversals of macro tailwinds that is expected over the next 3 years. In the past month, the major phenomenon impacting the equity capital markets has been the “Liquidity Crunch”. The trigger for the liquidity crunch was pulled by the default of IL&FS leading to widespread redemptions in the wholesale debt markets. The first round effect of these developments has been a sharp spike in short-term rates and tightening liquidity. As shown in the Exhibit 1 below, in the last 7 months, the 1-year G-Sec and 10-year G-Sec yields have risen by over 50bps (4-year high) and over 20bps (2-year high), respectively. Due to the ensuing uncertainty, BSE Sensex has fallen by over 10% in the last 2 months.