Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Year of Low Inflation, Growth Supportive Domestic Policies and
Robust Growth
2025 saw peak of global trade uncertainty, dovish global central banks and resilient
global growth. In India, the calendar year 2025 is marked as year of benign inflation,
pro-active and growth supportive fiscal and monetary policies, robust domestic
growth and resilient trade despite delayed US trade deal and high US tariff rate.
India
Inflation:
Nov’25 CPI inflation continued to remain low at 0.71%y/y (Oct 2025: 0.25%y/y; Nov 2024:
5.48%y/y), Core inflation eased to 4.3%y/y (Oct 2025: 4.3% y/y; Yr prior:3.6%y/y).
April-November 2025 average inflation is tracking 1.8% y/y (Below lower bound of RBI’s
medium-term target) on improved food supplies and GST rate cut. YTD core inflation
average ~4.25%y/y, 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-November 2025) Fiscal deficit stood at 62% of BE FY26 (Previous yr: 53%
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 in Dec was modest at 6% y/y, reflecting impact of GST cuts. YTD FY26
(Apr-Dec) GST growth was resilient at ~8% y/y.
Liquidity:
Average banking system liquidity in Dec’25 declined to ~Rs.0.7 trn (Avg. Nov: Rs. 1.9 trn)
on account of seasonality (advance tax outflows, pick up in credit etc). RBI was
proactive in infusing the liquidity (Open Market Operations (OMO): Rs. 1.5 trn; FX swaps:
US$5 bn).
External Sector:
The merchandise trade deficit for Nov’25 moderated to US$24 bn from record high
US$42 bn in previous month - indicating normalisation of deficit pressure, while
service trade surplus continued to grow robustly by 17%y/y (driven by robust services
exports & muted imports). During Apr-Nov 2025, the core goods exports & imports
(excluding oil & gold) grew at ~7%y/y and 9%y/y respectively. During similar period,
the net services exports grew at ~15%y/y.
Net FPI inflows turned negative (US$4.2 bn) after being small positive in October and
November. Fiscal year YTD (Apr-Dec) FPI flows were negative at US$4 bn (on US trade
deal concerns) vis-à-vis inflow of US$3 bn in entire previous fiscal year.
During the month Dec’25, INR depreciated by ~1.42%m/m and stood on average 90.09
against dollar (Sep 2025: 88.32; Oct 2025 :88.42; Nov 2025: 88.83). In the fiscal year till
date, the rupee has depreciated by ~5.1%.
Yield Levels & Spreads:
Fixed income market yields harden during the month on delay in US trade deal and
concerns about supply of State government securities in 4Q. This was despite dovish
RBI policy and proactive liquidity measures like (OMOs across tenure & FX swaps).
10-year G-sec yield eased initially on RBI’s policy and benign inflation, later picked up
on delay in trade deal and later eased towards the end of the month on
announcement of additional OMOs. 10-year G-sec moved in the range of
6.49%-6.67% during the month (Nov 2025: 6.45%-6.52%;). It closed Dec-2025 high at
6.58% (Sep 2025: 6.57%; Oct 2025: 6.47%; Nov 2025: 6.51%).
Taking cues from G-secs, the SDL yields moved up during the month on expectations
of higher supply in 4Q. 10-year SDLs moved in the range of 7.18%-7.40% (Prior month:
7.10%-7.20%). It closed the month at 7.39% (Sep 2025: 7.25%; Oct 2025: 7.14%; Nov 2025:
7.20%). The average spread between 10 yr SDL over G-sec stood higher at 72 bps
during the month (Sep 2025: 72 bps; Oct 2025: 68 bps; Nov 2025: 65 bps).
Similarly, 10-year AAA bond yields moved up and was in the range of 7.10%-7.30% (Prior
month: 7.13%-7.18%) and closed the month higher at 7.28% (Sep 2025: 7.22%; Oct 2025:
7.13%; Nov 2025: 7.13%).
Global
Financial Markets:
US Federal Reserve cut the policy rate by 25 bps 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. 10 yr U.S.Treasury (UST) close
the month higher at 4.18% (Sep 2025: 4.16%; Oct 2025: 4.11%; Nov 2025: 4.02%).
DXY continued to appreciate in Dec by ~1.2%m/m (Nov 2025: +ve 0.9%m/m). After
appreciating strongly in calendar year 2024 (7%), DXY depreciated by 9.4% in the
current calendar.
The brent crude oil continued to depreciate into December. The average crude oil
depreciated by 2% and stood at US$62.54/barrel on excess oil supply outlook (Avg.
Nov lvl at US$63.80/barrel). In calendar year, the brent crude averaged around
US$69.10/bbl (CY2024: US$80.52/bbl) on increased supply.
Market View:
- Dovish Dec’25 Monetary policy along with substantial OMO calendar for Dec’25 and Jan’26 indicate RBI to remain supportive. Three OMO purchase auctions (totalling Rs. 1.5 trn) in Jan’26 [Rs.50,000 crore each on 5th, 12th & 22nd Jan’26] may be yield supportive. In fact, the securities selected for the OMO auction (till now) are across tenure.
- With peak cash/credit demand season in January-March’26 quarter, we expect the RBI to announce further additional liquidity supportive measures (OMOs, FX swaps etc) in Feb/Mar’26.
- Going forward, we believe the G-sec market may 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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