Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Record Low Inflation, Dovish Monetary Policy and Robust Growth.
Nov’25 saw dovish RBI cut, robust economic growth, record low inflation, pressure on
currency and thereby its impact on liquidity and record high trade deficit.
India
Growth:
2Q (July-Sept) FY26 GDP print stood robust at 8.2% y/y (much higher than market
expectations) driven by buoyant private consumption and capex. From supply side,
manufacturing, construction and services grew robustly, driving GVA to grow at
8.1%y/y. With this, Indian economy grew buoyantly by 8%y/y in 1H (Apr-Sep).
Monetary Policy:
In Dec 2025 policy, the RBI made headway to full-fledged growth-centric dovish
policy. RBI outlined comprehensive measures to support growth: a). 25 bps policy
rate cut; b). Upfront and substantial OMO auction (Rs. 1 lakh cr) in Dec 2025 itself; c).
3 yr USD/INR FX Buy/Sell swap auction (US$5 bn). RBI revised downward FY26 Inflation
projection by 60 bps to 2%; while growth forecast has been revised upward by 50 bps
to 7.3%.
Inflation:
October 2025 CPI inflation eased to record low 0.25%y/y from downwardly revised
1.44%y/y in Sep. Core inflation inched up to 4.4%y/y driven by rise in gold and housing
prices. (Sep 2025: 4.3% y/y; Yr prior:3.7%y/y). April-October 2025 average inflation is
tracking 1.9%y/y (Below lower bound of RBI’s medium-term target) on improved food
supplies and GST rate cut. Apr-October 2025 core inflation average ~4.24%y/y, while
super-super core inflation (core inflation excluding transport and gold) continued to
remain benign (YTD FY26: average ~3.2%y/y).
Fiscal:
Apr-October FY26 Fiscal deficit stood at 53% of BE FY26 (Previous yr: 47% of BE). This
was primarily due to robust capex expenditure, while revenue receipts were muted.
YTD Net tax collections contracted marginally on higher tax devolution and muted
gross tax collections. That said, non-tax revenue and non-debt capital receipts
growth YTD has been robust.
GST growth continued to remain tepid in Nov (~1%y/y), reflecting impact of GST cut.
YTD FY26 (Apr-Nov) GST growth was resilient at ~8%y/y.
Liquidity:
Average banking system liquidity in November improved to ~Rs.1.9 trn (Avg. Oct: Rs. 0.9
trn). This was primarily due to CRR cut, OMO inflows, huge G-sec maturity (~Rs. 1 trn)
and government spending. The core liquidity (system liquidity + Government
balances), however, moderated to Rs. 2.6 trn in Nov end (Oct end: Rs. 3.3 trn; Sep end:
Rs 4.6 trn) on RBI’s FX intervention.
Balance of Payments:
2Q FY26 (July-Sep) current account deficit was modest at 1.3% of GDP supported by
robust services and NRI remittances. Capital flows were flattish during the quarter –
with FPI flows as a major drag, while Banking Capital and short-term credit provided
support. 2Q FY26 BoP was negative ~US$11 bn on sluggish capital flows.
External Sector:
The merchandise trade deficit for October 2025 rose to record high of ~$42 bln
(driven by Diwali effect and spike in gold demand due to wedding & festive season),
while service trade surplus continued to grow robustly by $20 bln (driven by robust
services exports & muted imports). During Apr-Oct, the core goods exports & imports
(excluding oil & gold) grew at ~5%y/y and 8%y/y respectively, despite sharp rise in
global headwinds. During similar period, the net services exports grew at ~17%y/y.
After remaining negative in prior four months, the net FPI inflows were positive in
October and November (driven by debt flows). Fiscal year YTD (Apr-Nov) FPI flows
were net flattish vis-à-vis inflow of US$3 bn in last fiscal year.
INR continued to depreciate albeit marginally in November. During the month, INR
depreciated by ~0.46%m/m and stood on average 88.83 against dollar (Sep 2025:
88.32; Oct 2025 :88.42). That said, INR moved sharply towards end of the month and
crossed 89 lvls. In the fiscal year till date, the rupee has depreciated by ~4.5%.
Yield Levels & Spreads:
Fixed income market yields remained range-bound during the month. 10-year G-sec
yield moved in the narrow range of 6.45%-6.52% during the month (Oct 2025:
6.42%-6.52%;). 10 yr G-sec closed Nov-2025 at 6.51% (Aug 2025: 6.59%; Sep 2025: 6.57%;
Oct 2025: 6.47%).
Taking cues from G-secs, the SDL yields were range-bound during the month. 10-year
SDLs moved in the range of 7.10%-7.20% during the month (Prior month: 7.11%-7.19%). It
closed the month at 7.20% (Aug: 7.29%; Sep 2025: 7.25%; Oct 2025: 7.14%). The average
spread between 10 yr SDL over G-sec stood lower at 65 bps during the month (Aug
2025: 55 bps; Sep 2025: 72 bps; Oct 2025: 68 bps).
Similarly, 10-year AAA bond yields moved in the narrow range of 7.13%-7.18% (Prior
month: 7.11%-7.22%) and closed the month at 7.13% (Aug 2025: 7.20%; Sep 2025: 7.22%;
Oct 2025: 7.13%).
Global
Financial Markets:
With US shutdown over and delay/lack of crucial hi-frequency data, US 10 Yr Treasury
bond (UST) yields were range-bound for major part of the month (4.10%-4.17%) and
eased towards the end of month on expectations of dovish Dec policy. 10 yr UST
close the month low at 4.02% (Sep 2025: 4.16%; Oct 2025: 4.11%).
DXY continued to appreciate in Nov by ~0.9%m/m (Oct 2025: +ve 1%m/m). That said,
DXY depreciated by ~8.3% in the current calendar year till date.
The average Nov crude oil depreciated by 1.2% at US$63.80/barrel on excess oil
supply outlook, although additional sanctions on Russia limited the downside bias
(Avg. Oct lvl at US$64.54/barrel)
Market View:
- In early December’25 policy, the RBI went all the way out to support growth (policy cut, ample liquidity), with clear indication to provide further policy support to boost growth. Further, the RBI mentioned that given the benign inflation outlook (including sharp downward revision in inflation expectations), the policy rate is likely to stay at low levels for long time.
- We believe that there is space for one more cut, aided by benign inflation, muted nominal growth, more clarity on US Fed cuts and trade deal and better visibility on domestic growth. Terminal rate in the current cycle is likely to be ~5%.
- On Dec 05, 2025, two Open Market Operations (OMOs) purchase auction announced (totalling Rs. 1 trn) are yield supportive. In fact, the securities announced in the first OMO auction clearly indicates broad-based and across the curve indicating support to yield curve across the tenor.
- With peak cash/credit demand season expected in January-March’26 quarter, we expect the RBI to announce further additional liquidity supportive measures (OMOs, FX swaps etc) in 4Q.
- Given the dovish policy along with indication to provide further support on rates and liquidity (OMOs, FX swaps), we believe the yields to ease from here on further rate cut expectations.
- Going forward, we believe the G-sec market will take cues from currency movement, US trade deal, UST movements and expectations of OMOs announcement.
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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