Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Iran War, Oil & Currency
March 2026 was marked by sharp rise in global uncertainty on the back of Iran war,
resulting in global supply shock driven by almost closure of Strait of Hormuz. This has
led to sharp rise in crude price, pressure on currency, rising concerns about supply
issues, fiscal deficit, inflation and growth. The financial, FX and commodity markets
were extremely volatile, resulting in policymakers across the globe taking measures
to reduce the brunt of war.
India
Inflation:
Feb’26 CPI inflation stood at 3.21%y/y (January 2026 at 2.74%y/y). The rise in monthly
print was driven primarily by adverse base effect (+ve 34 bps) and partially by
modest pick-up in sequential momentum (+ve 11 bps). Core inflation rose marginally
to 3.42% y/y (January 2026: 3.38% y/y). With this, YTD FY26 (April 2025-February 2026),
headline CPI is tracking 1.94% y/y (~ RBI’s lower bound of Inflation target); core inflation
is tracking ~4.1% y/y (~ RBI’s Medium-term target) & super-core inflation (exc. Petrol,
gold etc) is tracking 2.87%y/y.
Foreign Trade:
Feb 2026 trade deficit stood elevated at US$27 bn (decline from peak of US$35 bn in
Jan 2026 & higher than seasonality). While exports growth was flattish, the imports
grew robustly driven by core imports, gold and oil imports. During Apr-Feb2025-26,
the core goods exports & imports (excluding oil & gold) grew at ~6%y/y and 9%y/y
respectively. During similar period, the net services exports grew at ~15%y/y.
Monetary Policy:
In Apr’26 policy, the RBI kept the policy rate unchanged and maintained neutral
stance (in line with consensus expectations). This was in backdrop of peak global
uncertainty & supply shock driven by Iran war. RBI projected robust FY27 economic
growth (6.9%y/y) and higher inflation at 4.6%y/y (FY26 (P): ~2.1%y/y). RBI would remain
vigilant and may closely monitor incoming information since there is upside risk to
inflation outlook and downside risk to growth. RBI will continue to remain proactive
and preemptive in liquidity management.
Fiscal:
FY26 YTD (Apr-Feb 2025-26) Fiscal deficit stood at 81% of RE FY26 (Previous yr: 86% of
RE). This was primarily due to muted revenue expenditure, resilient revenue receipts
and robust non-debt capital receipts. YTD capital expenditure growth continued to
remain buoyant at ~15%y/y. On sources of funding fiscal deficit, YTD small savings has
already exceeded its upwardly revised annual estimates by good margin, while the
govt continue to hold huge cash balances indicating comfort in raising the funds.
System Liquidity:
Monthly Avg system liquidity eased from robust ~Rs. 2.5 trn to Rs. 1.5 trn in March 2026
on seasonality (advance tax outflows, higher cash demand) and FX intervention (Iran
war). During the month, the RBI provided substantial support in form of infuse of
durable liquidity (OMOs: ~ Rs. 2 trn).
Foreign Flows:
Iran war resulted in the sharp net FPI outflows to the tune of ~US$14 bn (driven by
equity). This is highest monthly outflows since pandemic. During FY26, FPI outflows
stood at US$17 bn (as against ~+US$3bn in FY25).
Currency:
During Mar’26, INR depreciated sharply by 4%m/m driven by Iran war and sharp surge
in Oil prices. INR stood on an average 92.8 against dollar (Feb 2026: 90.73). INR has
been under pressure for most part of the fiscal year. FY26 INR has depreciated by ~11%
impacted by delay in US trade deal & recently by oil price concerns.
Yield Levels & Spreads:
War impacted month witnessed sharp surge in oil prices, FPI outflows and pressure
on INR. As a result, the fixed income markets witnessed sharp rise in yields across the
curve and across the markets. That said, the RBI supported the market by aggressive
OMOs of ~Rs. 2 trn.
10-year G-sec moved in the range of 6.64%-7.00% during the month (Feb 2026:
6.65%-6.77%;). It closed the month much higher at 7.00% (Dec 2025: 6.58%; Jan 2026:
6.77%; Feb 2026: 6.66%).
Taking cues from G-sec, SDL yields rose during the month amidst higher supply &
global concerns. 10-year SDLs moved in the range of 7.37%-7.75% (Prior month:
7.37%-7.51%). It closed the month high at 7.61% (Dec 2025: 7.39%; Jan 2026: 7.47%; Feb
2026: 7.37%). The average spread between 10 yr SDL over G-sec stood marginally
lower at 72 bps during the month (Dec 2025: 72 bps; Jan 2026: 80 bps, Feb 2026: 75
bps).
Similarly, 10-year AAA bond yields moved in the range of 7.38%-7.70% (Prior month:
7.40%-7.48%) and closed the month higher at 7.70% (Nov 2025: 7.13%; Dec 2025: 7.28%;
Jan 2026: 7.47%).
Global
Financial Markets:
UST yield rose sharply during the month of Mar’26 on Iran war and rise in inflation
expectations. 10 yr UST close the month higher at 4.35 % (Dec 2025: 4.18%; Jan 2026:
4.26%; Feb 2026: 3.97%).
DXY appreciated in March 2026 by ~3%m/m (Feb 2026: 0.6%m/m) on risk averse
global environment driven by sharp rise in geopolitical concerns.
As a result of fallout of Iran war, the crude witnessed sharp acceleration during the
month on account of closure of Strait of Hormuz. While the brent crude oil has been
on appreciating mode since start of calendar year (Jan 2026: +6.5% m/m; Feb 2026:
+6.4% m/m), oil prices surge further by ~46%m/m in March 2026 on global supply
shock. The average crude oil stood at US$103 barrel (Avg. lvl in Feb 2026:
US$70.89/barrel).
Market View:
- In absence of clarity on war, the financial, FX(Foreign Exchange) and commodity markets are likely to remain volatile in coming weeks. The fear of extended war is feeding into concerns on macro stability. In this context, crude price and INR movement will be closely watched.
- The ongoing Israel-Iran war, if sustained for long (not yet the base case), may have a passthrough impact on inflation and growth alike. That said, more than month old war may still likely to impact external balance, growth and inflation.
- Proactive and pre-emptive measures of Policymakers (fiscal & monetary) may likely to reduce the impact. And more measures may be expected if war extends for long.
- The fiscal measures taken till date are likely to impact FY27 fiscal deficit target. This may impact the g-sec yields trajectory. That said, all the bad news is already factored in the market prices.
- In FY27, we could expect the RBI to continue to infuse the durable liquidity (OMOs) to mitigate the impact of FX intervention. Further, modest 1H G-sec issuances calendar and lower than expected 1Q FY27 SDL issuances may likely to provide support to G-sec yield.
Common Source:
RBI, CSO, FAO, CEIC, NSO, US Federal Reserve, US Treasury department, Commerce Ministry of India, Finance
Ministry of India, Mospi, NIMF Internal Research.
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