Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Changing Global Narrative, Fast Track Fiscal Consolidation and
Bond Inclusion
July-24 saw more and more global central banks changing policy narrative driven by
their domestic macros (Inflation, growth). While there has been rise in geo-political
uncertainty, the fear of moderation in global growth is on rise. Back home, the final
FY25 budget promised faster fiscal consolidation without comprising on capex.
Hi-frequency indicators for India continued to indicate robust fiscal dynamics, easing
inflationary pressure and improved external balances.
India
Union Budget:
Union Budget FY25 indicated that the government has moved from gradual fiscal
consolidation path (growth supportive fiscal policy) to fiscal normalisation (by
fast-tracking fiscal consolidation process). Earlier in the year, FY24 fiscal deficit (as %
of GDP) came in much lower at 5.6% of GDP as against revised estimate (RE). This,
despite, moderation in nominal GDP growth. In FY25, fiscal deficit is expected to
improve further to 4.9% of GDP (Interim Budget FY25: 5.1%) aided by - buoyant non-tax
revenue and modest expenditure growth.
Inflation:
After remaining ~4.8%y/y levels from March through May 2024, CPI inflation rose in
Jun’24 to 5.08%y/y (May 2024: 4.80% y/y, Last year same period: 4.87%y/y), driven
mainly by food inflation. Excluding veggies, headline inflation remained muted at
3.53%y/y (Previous month: 3.53%y/y; June 2023: 5.21%y/y). Core inflation continued to
remain muted at 3.14%y/y (May 2024: 3.12%y/y; Last year same period: 5.11%y/y).
Fiscal:
April-June 24 gross tax receipts grew robustly by ~24%y/y - driven by buoyant direct
tax collections and resilient indirect taxes. Record high RBI dividend resulted in sharp
spike in non-tax receipts. Expenditure registered degrowth driven down primarily by
muted revenue expenditure and sharp contraction in capex. As a result, Fiscal deficit
stood at record low 3% of budget estimates (Previous year similar period: 12%). July
GST data registered record third highest tax collections (Apr-July FY25: 10%y/y).
External Sector:
June Trade deficit moderated to~US$21 bn (Apr 24: US$19 bn; May 24: US$24 bn; Jun
24: US$21 bn). 1Q FY25 (Apr-Jun 2024) exports grew at muted 4.6%y/y, while imports
grew at ~8%y/y. Core imports growth (non-oil non gold) were muted. 1Q FY25 Net
services exports grew robustly at 13%y/y (1Q FY25 growth:15%y/y).
FPI (debt and equity) saw robust flows in June and July (cumulative: US$~11 bn) led by
bond inclusion rally. That said, Apr-July FY25 FPI flows were relatively muted at US$7.3
bn (4Q FY24: US$9 bn) on account of global asset repricing in the initial months of the
fiscal year.
Rupee marginally depreciated in May’24 through Jul’24 and stood at 83.59 against
dollar during July (June 2024: 83.47; May 2024: 83.39; Apr 2024: 83.41).
Bond Inclusion:
India became part of JP Morgan Bond index since end June 2024. In run-up to Bond
inclusion, robust FPI inflows into Indian G-sec market. Total inflows since Sep 2023
announcement have been to the tune of ~Rs.1.2 trn, out of which FAR (Fully Accessible
Route) securities got inflows to the tune of ~Rs.1.12 trn. July saw ~Rs.19,000 cr in FAR
securities (June 2024: ~Rs.17,000 cr).
Liquidity:
Banking system liquidity was positive during the month and eased to Rs. 1.1 trn (Jun
2024: -ve Rs. 50,000 cr; May 2024 ~-ve Rs.1.4 bn) on govt spending and lower cash
requirement. Government balances continued to remain robust and stood on an
average ~Rs. 3 trn (June 2024: Rs. 4.2 trn; May 2024: Rs. 3.5 trn). Core liquidity (system
liquidity + Government balances) stood at ~Rs.4.25 trn by July end (June end: ~Rs. 3.5
trn; May end: ~Rs. 3.6 trn).
Yield Levels & Spreads:
Fixed income market yields continued to remain range-bound during the month with
easing bias witness in second half of the month - on lower budgeted FY25 fiscal
deficit and global cues. 10-year G-sec yield moved in the narrow range of 6.98%-7.01%
in first fortnight and eased in second half to move in the range of 6.92-6.97% (June
2024: 6.95%-7.03%; May 2024: 6.98-7.16%). 10 yr G-sec closed the month lower at 6.92%
(June 2024: 7.02%; May 2024: 6.99%, Apr 2024: 7.20%). Average 10-year term premia
increased to average~11 bps during the month (June 2024: 2 bps; May 2024: 4 bps, Apr
2024: 13 bps) – on relatively faster easing of short-term rates aided by improved
liquidity and lower issuances.
Taking cues from G-sec, 10-year SDL yields eased a bit and were range-bound during
the month (range of 7.28-7.36% as against 7.30-7.42% in June) to close the month
lower at 7.28% (June 2024: 7.33%; May 2024: 7.40%; Apr 2024: 7.47%). July SDL primary
issuances stood ~ Rs.68,400 cr (June 2024: Rs. 52,000 cr; May 2024: Rs. 42,800 cr; Apr
2023: Rs. 51,200 cr). The average spread between 10 yr SDL over G-sec stood at 36 bps
during the month (June 2024: 37 bps; May 2024: 34 bps; Apr 2024: 29 bps).
Like G-sec and SDLs, AAA bonds were range-bound with easing bias, with 10 yr AAA
PSU moving in the band of 7.45%-7.49% (Previous month: 7.47%-7.54%). It closed the
month lower at 7.46% (June 2024: 7.49%; May 2024: 7.46%, Apr 2024: 7.56%).
Global
Monetary Policy:
Recently many global advanced economies (BoC, ECB etc) have shifted gear and
started rate cut cycle. The month saw Bank of England starting rate cut cycle, with US
federal reserve indicating rate cut cycle to begin from September onwards. With US
macro data, post meeting, coming lower rate than expectations raising the market
expectations of earlier rate cut. However, Bank of Japan hike the policy rate and
announced its quantitative tightening programme.
Financial Markets:
During the month of Jul’24, US treasury yields continued to ease further and rallied in
expectations of rate cut on the back of moderating economic data, easing inflation
and dovish US Fed. US 10 Yr Treasury bond (UST) yield moved in the range of
4.09%-4.48% (as against 4.36-4.63% in May 2024) and closed the month lower 4.09%
(June 2024: 4.36%; May 2024: 4.51%, Apr 2024: 4.69%). Dollar Index depreciated by
1%m/m in Jul (June 2024: flattish; May 2024: -ve 0.45%; Apr 2024: +ve 1.54%; CY2024
YTD: +ve 4.5%) on rate cut expectations.
Market View
- Going forward, the start of rate cut cycle by major advanced economies, coupled with rising expectations of early start of rate cut cycle in US is expected to provide further down-side bias to global fixed income yields.
- Indian bonds are likely to be supported by easing global yield bias, good macro, lower core inflation, reduced supply and improved demand (bond inclusion).
- Money markets are well-supported by ample system liquidity (seasonality, lower T-bill supply, FPI flows etc).
- While Inflation is expected to ease in 2Q FY25, the volatile food prices, strong domestic growth, global geo-political uncertainty is likely to keep RBI on hold in August’24 policy.
- Going forward, the RBI rate cut cycle size and timing may be influenced by evolving domestic inflation outlook along with global policymakers’ actions timeline. We believe RBI to cut the rates in 2H (Oct/Dec) of the FY25.
Common Source:
RBI, CSO, FAO, CEIC, NSO, JP Morgan, US Federal Reserve, US Treasury
department, Commerce Ministry of
India, Budget Documents, NIMF Internal Research
Disclaimer:The information contained in this document is for general purposes only and
not a complete disclosure
of every material fact of Indian Budget. For a detailed study, please refer to the budget documents
available on
http://www.indiabudget.gov.in
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken based on this document.
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared based on publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken based on this document.