Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
US Trade deal, Robust Growth, Fiscal Consolidation and
Monetary Pause
Early February 2026 saw presentation of Union Budget, conclusion of much-awaited
US trade deal and pause in monetary cut cycle. While the Union Budget continued to
remain on fiscal consolidation mode (sticking to FY26 fiscal deficit target and
budgeting marginal lower fiscal deficit target for next fiscal), the RBI preferred to keep
monetary policy rate unchanged (in line with expectations). The conclusion of
much-awaited US trade deal is expected to be positive for INR and foreign flows.
Robust economic growth projections, despite sharp rise in geo-political risk, reiterate
resilient domestic growth story.
India
Union Budget:
Despite downward revision in FY26 tax collections, Union Budget plan to achieve the
FY26 fiscal deficit target of 4.4% of GDP (in line with BE). Budget has projected FY27
fiscal consolidation to continue, albeit marginally (at 4.3% of GDP). This target is
based on modest revenue and expenditure growth, while keeping capex growth
robust.
In FY27, Union Budget plan to source its funding primarily from market borrowings
(G-sec + T-bills). In absolute terms, net borrowing number (G-sec + T-bill) has
increased sharply to Rs. 13 trn (FY26 RE: Rs. 11.3 trn). FY27 Gross borrowing number is
expected to be at record high Rs. 17.2 trn on back of huge maturities.
Monetary Policy:
After 125 bps cut in the current cycle, the RBI kept the policy rate unchanged in
February 2026 policy. Reason for pause: Broad-based resilient economic and muted
inflation outlook. In the policy, the RBI marginally revised upward inflation and growth
projections. There was no big bang Liquidity announcement in policy, apart from the
regular statement that the “RBI will remain pro-active in liquidity management and
ensure sufficient liquidity in the system.
Economic Growth:
According to CSO’s Advance estimates, Indian Economy is likely to grow at 7.4%y/y in
FY26 (FY25: 6.5%y/y). The growth is likely to be driven by robust private consumption
and capex. From supply side, the growth is likely to be driven by manufacturing,
construction and services.
Inflation:
December 2025 CPI inflation continued to remain muted at 1.33%y/y (Nov 2025:
0.71%y/y; Dec 2024: 5.22%y/y). Core inflation rose to 4.6% y/y driven by pickup in
miscellaneous (Read: Gold). (Nov 2025: 4.34% y/y; Yr prior:3.6%y/y). As a result,
inflation continued to remain subdued during Apr-Dec (average 1.7%y/y) on
contracting food and muted core (excluding gold) prices. YTD Core inflation
averaged 4.3%y/y (~ RBI’s medium-term target). while super-super core inflation
(core inflation excluding transport and gold) continued to remain benign (YTD FY26:
average ~3.1%y/y).
Fiscal:
FY26 YTD (Apr-Dec 2025) Fiscal deficit stood at 55% of BE FY26 (Previous yr: 57% of BE).
This was primarily due to robust capex expenditure, while revenue expenditure and
revenue receipts were muted. That said, there has been improvement in tax
collections since Dec 2025. Further, YTD Non-tax revenue and non-debt capital
receipts growth has been robust.
GST growth in January 2026 was modest at 6.2% y/y, reflecting impact of GST cuts.
YTD FY26 (Apr 2025-January 2026) GST growth was resilient at ~8% y/y.
Liquidity:
Average banking system liquidity in January remained modest at ~Rs.0.7 trn (~Dec
2025 lvls; Much lower than Avg. Apr-Nov: ~Rs. 2 trn) on account of seasonality (cash
demand, pick up in credit) & RBI’s FX actions. During the month, the RBI was proactive
in infusing the liquidity (OMO: Rs. 2.1 trn; FX swaps: US$10 bn).
External Sector:
The merchandise trade deficit for December 2025 stood at US$25 bn (marginally
higher than previous month), while service trade surplus continued to grow robustly
by 18%y/y (driven by robust services exports & muted imports). During Apr-Dec 2025,
the core goods exports & imports (excluding oil & gold) grew at ~6.2%y/y and 8.8%y/y
respectively. During similar period, the net services exports grew at ~15%y/y.
In January, the net FPI inflows continued to remain negative (-ve US$3.2 bn) for
second consecutive month. Fiscal year YTD (Apr 2025-Jan 2026) FPI flows were
negative at US$7 bn (on US trade deal concerns) vis-à-vis inflow of US$3 bn in entire
previous fiscal year.
During the month, INR depreciated by ~0.8%m/m and stood on average 90.80
against dollar (Dec 2025: 90.09). In the fiscal year, the rupee has depreciated by 7.4%,
primarily due to tepid foreign flows and delay in US trade deal. That said, since
conclusion of US trade deal, INR has appreciated by 1.3% (till Feb 6, 2026) clearly
indicating positive outlook for INR
Yield Levels & Spreads:
Fixed income market continued to harden during the month on delay in US trade deal
and concerns over FY27 gross borrowings. This was despite proactive liquidity
measures (like huge weekly OMO auction & FX swaps). 10-year G-sec yield was
range-bound initially supported by modest monthly inflation print, lower oil prices. But
delay in US trade deal, pressure on currency, rise in geo-political risk, crude prices and
concerns regarding FY27 gross borrowing number push up the G-sec yields during
the month. 10-year G-sec moved in the range of 6.58%-6.79% during the month (Dec
2025: 6.49%-6.67%;). It closed the month high at 6.72% (Oct 2025: 6.47%; Nov 2025:
6.51%; Dec 2025: 6.58%).
SDL yields moved up during the month on higher supply. 10-year SDLs moved in the
range of 7.28%-7.49% (Prior month: 7.18%-7.40%). It closed the month at 7.47% (Oct
2025: 7.14%; Nov 2025: 7.20%; Dec 2025: 7.39%). The average spread between 10 yr SDL
over G-sec stood higher at 80 bps during the month (Oct 2025: 68 bps; Nov 2025: 65
bps; Dec 2025: 72 bps).
Similarly, 10-year AAA bond yields moved up and was in the range of 7.28%-7.39%
(Prior month: 7.10%-7.30%) and closed the month higher at 7.47% (Oct 2025: 7.13%; Nov
2025: 7.13%; Dec 2025: 7.28%).
Global
Financial Markets:
US Federal Reserve left the policy rate unchanged in January meeting (in line with the
expectations) and indicated clearly that the further actions will be data dependent.
With three consecutive cuts since Sep 2025, the market expects the next cut in later
part of the CY 2026. UST yield inched up during the month on supply concerns. 10 yr
UST close the month higher at 4.26% (Oct 2025: 4.11%; Nov 2025: 4.02%; Dec 2025: 4.18%).
DXY depreciated in January 2026 by ~1.2%m/m (Dec 2025: -ve 1.2%m/m).
After depreciating for three consecutive months, the brent crude oil appreciated in
January 2026. The average crude oil appreciated by 6.5% m/m and stood at
US$66.60/barrel (Avg. Dec lvl at US$62.54/barrel). The increased in prices was due to
rise in geopolitical risk and concerns about the supply.
Market View:
- In early February 2026 policy, the RBI Governor reiterated that the rates are likely to remain lower for longer amid benign inflation outlook. That said, given the robust economic outlook, the RBI’s further actions are expected to be data dependent.
- In the backdrop of resilient growth dynamics and removal of uncertainty due to US trade announcement, we believe that the current policy rate is ~ terminal rate of the current cycle.
- Recent RBI’s actions and its reiteration in February 2026 policy that it may ensure adequate liquidity. That said, with pressure on INR reduced due to trade deal, the liquidity measures related to FX actions are likely to be limited.
- RBI is expected to remain supportive on liquidity (especially through OMOs). Further, reduce pressure on INR & flows post US deal is likely to be G-sec supportive. That said, the huge gross borrowings number for FY27 and seasonally high SDLs auction supply is likely to keep pressure on the yields in near term.
- Market will watch out for the new index number for inflation and growth (to be release this month), with expectations of the likely fallout on monthly/quarterly print due to changes in the weights. This is likely to have impact on RBI’s inflation and growth projections (& thereby on monetary policy).
Common Source:
RBI, CSO, FAO, CEIC, NSO, US Federal Reserve, US Treasury department, Commerce Ministry of India, Finance
Ministry of India, Budget Document, NIMF Internal Research.
Disclaimer:
The views expressed here-in are based on publicly available information and other sources believed to
be reliable. It is issued for information purposes only and is not an offer to sell or a solicitation to buy/sell any mutual
fund units/securities. It should b e noted that the analysis, opinions, views expressed in the document are based on
the Budget proposals presented by the Honorable Finance Minister in the Parliament on Feb 1, 2026, and the said
Budget proposals may change or may be different at the time the Budget is passed by the Parliament and notified
by the Government. 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.