Factsheet Index
Fixed Income
Market Update
and Outlook
Market Update
Growth & Inflation gaining traction in backdrop of rising headwinds from Virus
Economic Growth:
After growing robustly in 2Q FY22, hi-frequency indicators suggest that recovery is regaining traction. Corporate sector has displayed resilience and bank credit growth is showing signs of gradual recovery. December Manufacturing PMI continued to indicate improvement in production activities although there was loss of momentum from November highs. While globally, new virus showed a virulent rise across nations, it was towards the end of December that it has shown a pick-up in India. Global growth and trade have been already adversely impacted in 3Q of CY2021 and sharp rise of new virus variant since November has resulted in headwinds to growth in last quarter of year. Going forward, supply bottlenecks, inflation and uncertainty regarding new version of virus might act as headwind to future outlook (India and Global).
Inflation
November 2021 Headline CPI print came higher at 4.91%y/y (Previous month: ~4.48%y/y). Sequentially, higher than seasonal momentum in food (supply issues, unseasonal rains) & clothing (higher cost of production) pushed up the headline print, while favourable base effect and cut in fuel excise duty helped in keeping headline inflation down. Core inflation rose a bit to 6.21%y/y (Previous: 6.17%y/y) mainly on sharp increase in clothing, personal care, recreation and household goods and services. While the headline number still continues to be around RBI’s target, worsening global macros (in terms of sharp rally in commodities, supply chain issues, pandemic related restrictions) and domestic factors (rising cost of production, pick-up in demand, volatile crude prices, telecom hike) are likely to keep prices elevated.
Globally, consistently over last couple of months, the inflation has been showing northward trend - driven by base effect, pick-up in economic activities, broad-based supply issues, rising food, commodities, manufacturing and services prices. In fact, over last couple of months, Inflation has sharply increased in US, Europe & UK. Inflation has been on uptrend across emerging economies. Now with the new virus, supply side issues are likely to persist for longer making higher inflation more entrenched.
Monetary:
Globally, most central banks have already embarked on the path of normalisation with many emerging economies already done with more than couple of hikes. Many advanced economies have started process of rate/liquidity normalisation. US Fed, after embarking on the path of liquidity normalisation in November, gave clear indicator in December of early tapering of liquidity and early start of rate normalisation, with DOT chart indicating three hikes in 2022 itself. Surprise hike by Bank of England and its hawkish statement indicates that normalisation is way ahead for both advanced and emerging economies, with inflation now taking precedence over growth for policy makers.
Back home, against consensus of reverse repo hike and global backdrop of rate normalisation, RBI preferred to keep rate unchanged in Dec policy indicating domestic dynamics continues to dominate RBI. While RBI is getting confident on growth front, it firmly believes the need for continued support (both in terms of lower rates and accommodative policy) for ensuring durable and self-sustaining growth. While RBI preferred to hold rates, it continued with its policy of gradual liquidity normalization. It has clearly indicated that from January 2022 onwards, liquidity absorption will be mainly undertaken through auction route (14 days variable reverse repo auctions).
Fiscal:
April-November fiscal print continued to assert robust revenue growth (driven primarily by tax revenues & RBI dividend) reflecting domestic recovery, increased formalisation of economy and reduced tax evasion. While expenditure growth picked up from August onwards (both revenue and capex). April-November expenditure growth still stood at modest 10%y/y. Robust revenue growth and muted expenditure has kept fiscal deficit at record low ~46% of budgeted estimates (Normal times: 100%-120% of BE). December GST print was buoyant at 1.3 trn (record collections for third consecutive month) indicating pick-up in economic activities. That said, Government officials have been asserting that back-loaded expenditure, lower disinvestment collections and more off-budget items brought above the line in the budget are likely to ensure elevated FY22 fiscal deficit.
India’s External Sector & Global Update
Crude was volatile during the month on rising concern about the new virus variant - Omicron. While first half of the month saw brent at average US$72.79/barrel, it rose to average US$75.70/barrel in second half to close the month at US$77.72/barrel, as economic impact of virus was expected to be lower than previous wave. That said, Crude has increase by 45% in current calendar year, having implication for global growth and inflation. With winter, festive season and no major supplies expected, the crude prices are expected to remain volatile in near future.
In the bond markets, US treasury yields remained volatile during December on higher inflation print, hawkish Fed policy. It started month on negative note, taking cues from rising concerns about virus and rose towards end of month on likely lower impact of new virus. The US 10 Yr Treasury bond yield started the month at 1.4%, touched 1.55% levels towards end of month to close the month at ~ 1.51% (Nov end: 1.58%, Oct end: 1.55%, Sep end: 1.52%, Aug end: 1.3%, July end: 1.24%). Dollar Index continued to appreciate for fifth consecutive month.
Back home, after appreciating marginally in November, INR depreciated against dollar (Avg Dec: 75.53/US$ against Nov: 74.50/US$). Depreciating pressure was visible not just in India but in most emerging markets, on rate normalisation in advance economies resulting in capital outflows from EMs.
After witnessing net inflows in Aug-Sep, there was net FPI outflows since, driven mainly by equities on reversal of flows towards advanced economies. December saw marginal decline in forex reserves to US$635 bn by mid-month. YTD FY22 Forex reserves rose by US$58 bn.
Yield Levels & Spreads:
G-sec yields started on negative note on expectation of rate normalisation in RBI policy, but eased a bit post policy on dovish RBI policy. However, it increased on global cues (hawkish US and UK central policies, rate normalisation in emerging markets) and improved domestic hi-frequency indicators and expectation of relatively lower impact of new virus). The 10 Yr benchmark hovered between 6.35%-6.48% during the month, only to close the month at 6.46% (Nov: 6.33%, Oct: 6.39%, July through Sep end: 6.20% - 6.22% range). Term premium (10 yr over 365 days) eased to average ~ 224 bps in Dec (Nov: 228 bps, Oct: 244 bps, Sep: 253 bps, Aug: 259 bps) on reduced steepness of yield curve.
Taking cues from G-sec, although 10 yr SDL was on an average ~6.88%, however, it closed month higher at 6.99% (Nov end: 6.81%, Oct end: 6.92%, Sep end: 6.79%, Aug end: 6.88%, July end: 6.96%). SDL primary supply was Rs. 54,385 cr (Nov: Rs. 43,502 cr, Avg Aug-Oct: 55,000 cr). The spread between 10 yr SDL over G-sec narrowed further to average 47 bps in Dec (Nov: 54 bps, Oct: 57 bps, Sep: 61 bps, Aug:71 bps). AAA bonds were volatile during the month. 10 yr AAA PSU closed the month at 6.84% (Nov end: 6.88%, Oct end: 6.91%, Sep end: 6.80%, Aug end: 6.93%).
Common Source:
Bloomberg, RBI, CEIC, Finance Ministry of India, NIMF Research
Market View
  • Rising concerns about new virus variant in India and globally is raising concern about growth on one hand and elevated crude and commodity prices, supply chain disruptions have implications in form of higher inflation on the other hand. Already Inflation in many parts of world is at multi-year high and many emerging economies have already switched to normalisation path, with advance economies like US Fed and Bank of England already moving/ indicating to normalisation of rates. Global cues, domestic development (improving growth prospects) along with new virus variant has led to a lot of uncertainty for RBI.
  • RBI has already embarked upon the path of Liquidity normalisation. Overnight rates are at/above reverse repo rate (trending below reverse repo post Covid on the back of humungous liquidity). RBI has already announced its intention to shift towards auction mode for active liquidity management. Going forward, yield curve is likely to be supported by improving fiscal position of the government, despite cut in excise duty. Government is likely to adhere to the budgeted fiscal numbers, by back-loading expenditure to support growth.
  • The current steepness in the yield curve along with the RBI policy makes the outlook constructive for most debt funds.
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