Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Easing Global inflation pressures, US Fed Pivot, Declining UST
and weak dollar index
Globally, December 2023 saw decline in US inflation, decline
in US treasury yields, depreciating dollar and US federal
reserve pivot to dovish policy.
Robust growth, slowing momentum of headline and core inflation
(although volatile food prices are key concern), robust
fiscal, manageable external balances and neutral monetary
policy were key macro data-points for Indian fixed income
markets.
India
Monetary Policy:
In early Dec’23 policy, the RBI maintained status quo on
policy rate and left monetary stance unchanged - in line with
consensus expectations. While gradual decline in inflation
outlook and muted core inflation print were highlighted in
policy, the RBI remains cautious of impact of recurring food
shocks on headline inflation prints. RBI also revised upward
economic growth for FY24 to 7% (previous estimate: 6.5%),
while retaining FY24 inflation projections at 5.4%.
Inflation:
After easing to below 5% mark in October’23, CPI inflation
rose to 5.55% y/y in November’23, driven by adverse base
effect and increase in food inflation. That said, the monthly
print was lower than consensus expectations. Excluding
veggies, headline inflation eased to 4.77%y/y (Previous month
(Oct’23): 5.04%y/y; November 2022: 6.97%y/y). Core inflation
continued to ease to 4.11%y/y (October 2023: 4.26%y/y; Last
year same period: 6.02%y/y).
Fiscal:
April-Nov 2023 gross & net tax collections grew robustly by
~15%y/y and 17%y/y respectively - driven by buoyant direct tax
collections. Expenditure growth was muted at ~9%y/y driven
primarily by higher double digit capital expenditure. As a
result, Fiscal deficit stood at ~51% of budget estimates
(Apr-Nov 2022: 59%). December’23 advance tax payment and GST
data continued to indicate buoyant tax collections. That said,
momentum for month of November’23 on expenditure front was
muted, impacted by adverse base effect and lower monthly
spending.
External Sector:
2Q FY24 (Jul-Sep) current account deficit (CAD) eased to 0.96%
of GDP (1Q FY24: 1.1%; 2Q FY23: 3.8%) aided by robust services
trade and resilient NRI remittances. Foreign flows were
subdued mainly due to negative FDI (foreign direct investment)
flows and ECBs (External Commercial borrowings), although
FPIs, banking capital and short-term credit remained robust.
2Q Balance of Payment (BoP) moderated to US$2.5 bn (1Q FY24:
US$24.5 bn) on modest capital flows.
November 2023 Trade deficit eased sharply to ~US$21 bn (Oct
2023: ~US$30 bn) driven down mainly by broad-based decrease in
imports (especially gold) and mean revert to normal levels.
Net services exports continued to grow robustly at 25% y/y
during the month, thereby helping to improve current account
balances.
December 2023 saw record FPI inflows (both in equity & debt)
to ~US$ 10 bn. With this, Apr-Dec 2023 saw overall strong
inflows of ~US$32 bn – in sharp contrast to contraction of FPI
flows of ~US$6 bn in FY23.
Average Rupee was flattish against US dollar in Dec 2023 and
stood at 83.28 during the month (Nov 2023: 83.30). While Rupee
has depreciated marginally by ~0.40% against dollar in CY23,
it has depreciated by ~1% in FY YTD (Apr-Dec 2023).
Liquidity:
December 2023 saw core liquidity (system liquidity +
Government balances) declined from 2.5 trillion in Nov 2023 to
~2.2 trillion by Dec’23 end, on back of cash demand & credit
pick-up.
Yield Levels & Spreads:
Fixed income yields continued to ease in December driven by
better-than-expected monthly inflation print, dovish US
Federal reserve and easing crude price concerns.
10-year G-sec yield (which was moving in the range of
7.24-7.29 in Nov’23), started the Dec’23 month at 7.29 and
stayed in that range till monthly inflation print release and
US federal reserve meeting, eased thereafter to stay in the
range of 7.16-7.21%. 10 yr G-sec closed the month at 7.18%
(Nov 2023: 7.28%; Oct 2023 end: 7.35%).
Money market rates continued to remain elevated during the
month on tight liquidity driven primarily by advance tax
outflows, credit pickup and higher government balances.
10-year Term premia (10 yr over 365 days) eased further to 10
bps (Nov 2023: 15 bps) on relative outperformance of longer
end over shorter end yields.
Like G-sec, 10-year SDL yields eased albeit marginally and
were in the range of 7.57-7.69% to close the month lower at
7.62% (Nov 2023: 7.69%). December SDL primary supply was
robust at ~Rs.67,683 cr (Nov 2023: Rs. 85,670 cr). The average
spread between 10 yr SDL over G-sec rose to 41 bps during the
month (Nov 2023: 36 bps) on higher supply.
In December, AAA bonds remained range-bound with easing bias -
with 10 yr AAA PSU moving in the band of 7.65%-7.77% (Previous
month:7.68-7.73%). It closed the month marginally lower at
7.65% (Nov 2023: 7.70%).
Global
Monetary Policy:
In Dec 2023 policy, US Federal Reserve clearly indicated that
the policy rates have peaked and indicated more rates cuts in
2024 than indicated in Sep’23 policy. Post policy press
meeting Federal governor speech was dovish, taking comfort
from easing inflationary pressures.
Inflation:
US inflation eased further to 3.1%y/y in Nov 2023 from 3.2% in
October driven by decline in energy and food. While global
food prices have been in disinflation for twelve consecutive
months, (with IMF’s FAO food index down to negative 10.7%y/y
in Nov 2023 vis-à-vis %y/y one year prior), there is
uncertainty about food price outlook (on El Nino concerns and
erratic climate).
While volatile, the oil prices continued to decline in
December and average ~US$78/barrel (Nov 23: US$83/barrel).
Financial Markets:
During the month, US treasury yields eased on easing inflation
and dovish federal reserve pivot. While pre-inflation and Fed
policy, US 10 Yr Treasury bond (UST) yield was ~4.20 lvls, it
eased post data and meeting to average ~3.90 levels. It closed
the month lower at 3.88% (Nov 2023: 4.37%, Oct 2023: 4.88%).
Dollar Index continued to depreciate by ~1.7% m/m in Dec 2023.
With this depreciation, Calendar year 2023 dollar index
decline by ~2%.
Market View
- Volatility of food prices has been key driving factor to the evolution of headline CPI trajectory during Apr-Nov 2023. As highlighted in RBI policy, Food inflation will be closely monitored. While El Nino impact and erratic climate may continue to impact food outlook, going forward seasonality in food prices (i.e., easing bias in winter) is likely to help reduce pressure on headline.
- Core inflation is at 4.1% (Nov’23) and expected to remain muted in 4Q (Jan-March) FY24 helped by favourable base effect and muted sequential momentum.
- In near term, with domestic growth outlook robust, RBI is likely to remain on hold even with the lower inflation print (although above targeted level). That said, policy rates are expected to ease over the medium term. We do expect RBI to continue to actively manage liquidity as effective policy instrument.
- System Liquidity has remained in deficit on average ~Rs.81,000 cr since mid-Sep’23 - driven by festive season demand, advance tax payment and credit pickup. In January’24, we expect the liquidity to improve a bit on government spending, although credit pick-up and cash demand may continue to keep liquidity tight.
- Since 3Q FY24 (Oct-Dec), global pressure points have reduced. From buoyant growth to growth slowdown outlook for global economy. This is getting reflected in crude and UST levels. Going forward, the RBI is likely to take cues from domestic growth/inflation dynamics.
Common Source:
RBI, CSO, FAO, CEIC, JP Morgan, US Federal Reserve, US
Treasury department, Commerce Ministry of India, NIMF
Internal Research.
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