Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Tariff Uncertainty, Improving Inflation outlook, Ample Liquidity
and Front-loading of Spending
July 2025 saw reduced tariff related to uncertainty globally, while it continued to
remain elevated for India in absence of deal and in anticipation of higher reset of US
tariff from August.
Back home, improving inflation outlook supported by good monsoon, ample liquidity
and robust spending were key highlights of the month.
India
Monetary Policy:
In the early August’25 policy, the RBI left the policy rate unchanged at 5.5%. Benign
inflation and resilient growth outlook were the key highlights of the policy. Despite mix
signals from hi-frequency indicators and rising tariff related uncertainty, the RBI kept
the FY26 growth projections unchanged at 6.5%, while it revised downward FY26
inflation projections by 60 bps to 3.1%y/y. In the policy, the RBI provided neutral pause
with data dependent as a forward guidance.
Fiscal:
1Q FY26 Fiscal deficit stood modest at 18% of BE FY26 (Previous yr: 8% of BE). This was
aided by Robust receipts. Growth in revenue receipts was driven primarily by non-tax
revenue, while net tax revenue contracted marginally on muted collections and
higher devolution to the states. On other hand, expenditure growth was robust at
higher double-digit (26%y/y), partially aided by the favourable base effect and
front-loading of expenditure (especially Capex grew).
After picking up in April-May, GST growth moderated to 6.2%y/y in June & 7.5%y/y in
July 2025. That said, YTD FY26 (Apr-Jul) growth was resilient at ~11%y/y.
Inflation:
June 2025 CPI inflation eased to record-low level of 2.1%y/y (Better than consensus
(2.25%y/y) and Lowest since Jan 19). The lower print is supported by favourable base
effect, lower than seasonal momentum in food and sequential contraction of fuel &
housing prices. Core inflation rose to 4.43%y/y in June, driven primarily by elevated
gold prices. (Avg Prior three months: 4.15%y/y). Food prices contracted marginally
(-0.2%y/y) – lowest since Jan 2019. 1Q FY26 (Apr-Jun) CPI inflation moderated to
average 2.7%y/y from 3.7%y/y in Jan-Mar 2025 quarter.
Liquidity:
Since April, system liquidity has eased substantially, with further improvement
evident in July. Average monthly liquidity improved to Rs. 3.1 trillion in June (Apr: Rs. 1.4
trn; May: Rs. 1.7 trn; Jun: Rs. 2.8 trn) on Govt spending, buybacks and lower cash
demand.
The core liquidity remained ample at ~Rs. 5.5 trn in July (Jun: Rs 5.7 trn) on higher Cash
Reserve Ratio (CRR) requirement and RBI’s FX actions.
External Sector:
June Trade deficit moderated to ~US$19 bn (May 25: US$22 bn), on sharp decline in
core imports. June 2025 net service exports grew robustly at ~20%y/y due to resilient
services exports and tepid services imports.
Net FPI inflows continued to remain negative in July 2025 to US$0.6 bn (Jun 2025: -ve
US$0.9 bn) driven down by equity outflows.
DXY continued to depreciate for sixth consecutive month, on rising tariff uncertainties
and growth concerns. DXY depreciated by ~8% in the current calendar year till date.
INR continued to depreciate in July and stood on average 86.10 against dollar (Apr:
85.56; May 2025: 85.19; Jun: 85.90). In the calendar year 2025, the rupee has
depreciated by ~2.3%.
Yield Levels & Spreads:
July’25 saw fixed income market yields move in narrow range for most part of the
month. G-sec yields eased initially on lower monthly inflation print and muted crude
oil prices, but rose towards the end of the month on rising concern of delayed US tariff
deal, higher crude prices and pressure on INR. 10-year G-sec yields started the month
at 6.36% and moved in the narrow range of 6.30%-6.33% for most part of the month
(Jun 2025: 6.32%-6.39%). 10 yr G-sec closed the month higher at 6.38% (Apr 2025:
6.36%; May 2025: 6.25%, Jun 2025: 6.36%).
Like G-sec, 10-year SDL moved in narrow range of 6.75%-6.80% for most part of the
month (Jun 2025: 6.65%-6.74%;) and closed the month higher at 6.86% (Apr 2025:
6.67%; May 2025: 6.61%; Jun 2025: 6.73%). July SDL primary issuances stood at Rs. 96,769
cr (Jun 2025: Rs. 82,207 cr). The average spread between 10 yr SDL over G-sec stood
at 47 bps during the month (Jun 2025: 35 bps).
10-year AAA bonds moved in the narrow range of 6.99%-7.04% (Jun 2025:
6.89%-7.02%). 10 yr AAA PSU closed the month higher at 7.04% (Apr 2025: 6.98%; May
2025: 6.85%; Jun 2025: 7.02%).
Global
Monetary Policy:
July 2025 saw major global central banks (US Federal Reserve, ECB, Bank of Japan)
keeping the policy rates unchanged and preferring data dependent approach.
Going forward, the central banks (CBs) are likely to prefer gradual rate cut cycle on
back of global uncertainties.
Financial Markets:
US 10 Yr Treasury bond (UST) yield harden a bit and moved in the range of
4.26%-4.50% and close the month higher at 4.37% (Apr 2025:4.17%; May 2025: 4.41%; Jun
2025: 4.24%). Yield movement was driven by better-than-expected 2Q GDP, higher
reset of US reciprocal tariff than previously expected, higher inflation print, fiscal
concerns and data-dependent US Federal Reserve.
Dollar index (DXY) continued to depreciate for sixth consecutive month by 0.5% (Apr
2025: -ve 3.3%m/m; May 2025: -ve 0.58%m/m; Jun 2025: -ve 1.7%).
After rising sharply in June’25, the average July’25 crude oil remained stood around
June lvl at US$71.04/barrel.
Market View
- US reciprocal tariff, and geopolitical uncertainties are likely to weight on India's growth and currency outlook.
- Policy-makers decision-making is likely to be influenced by improving inflation outlook, mixed growth trends (Purchasing Managers Index {PMI}, industrial production, credit growth etc) and tariff implications on trade, currency and foreign flows.
- In the early August’25 policy, the RBI has admitted that the average FY26 CPI to remain significantly below medium target. That said, RBI expect the headline CPI print to edge above 4% from 4Q onwards (driven primarily by adverse base effect) and core inflation to stay moderately above 4% in FY26.
- RBI is likely to remain data dependent for future policy actions - tracking closely evolving trends in inflation, growth and external sector.
- System Liquidity is likely to remain ample in August’25 on seasonally lower cash demand and lower activity months (due to monsoon). Further, with CRR cut to be implemented in September through November’25, the RBI continues to remain supportive and nimble on liquidity front.
Common Source:
RBI, CSO, FAO, CEIC, NSO, US Federal Reserve, US Treasury department, Commerce Ministry of India, Finance
Ministry of India, ECB, BoJ, NIMF Internal Research
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