Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Hawkish Global Central Bankers, resilient domestic growth and
moderating domestic inflation
June-23 saw gradual decline in domestic monthly inflation, resilient domestic growth
and robust fiscal balances. While there were concern about monsoon due to delayed
rains, rains towards end of month have improved the outlook. FPI flows continued to
be robust, with rupee displaying appreciating bias. Globally, Central Banks turned
more hawkish, with focus completely on inflation.
India
Monetary Policy:
In early June 2013 meeting, the RBI left policy rate & stance unchanged. This was in line
with consensus expectations.The current macro-dynamics and RBI’s projections indicates
that the inflation is evolving in line with its medium-term trajectory - giving RBI space to maintain
status quo. That said, Governor’s reference to recent rate hike by couple
of developed countries’ central banks after pausing indicates RBI’s determination to
remain vigilant of inflation risks. On inflation, RBI is focused on aligning inflation
progressively with the medium-term target on durable basis (as indicated in Apr &
June policy & highlighted in post-policy meeting).
Inflation:
May 2023 CPI inflation eased to 4.25% y/y (Previous: 4.7%y/y) – in line with consensus.
Headline print was lowest since Apr 2021. Inflation moderation was aided by
favourable base effect and slightly lower sequential momentum than seasonality.
Core inflation declined to 5%y/y (April 2023: 5.2%y/y; 2H FY23 avg: 6%; Lowest since
May 20). June’23 print is expected to be below 5% mark aided by favourable base
effect.
Fiscal:
Apr-May 2023 tax collections moderated a bit on adverse base effect, while
expenditure growth was modest. As a result, Fiscal deficit for first two months stood
at ~12% of budgeted estimates. Revenue expenditure growth declined on adverse
base effect; while capex continued to accelerate at robust rate. Preliminary
estimates of advance tax and robust June GST data indicates that overall tax
collections till date continues to remain strong.
Auction calendar
2Q FY24 SDL auction calendar came in at Rs. 2.37 trillion (1Q FY24: calendar ~ Rs. 2 trn
& actual Rs. 1.68 trn). Similarly, 2Q T-bill calendar was announced at Rs. 3.12 trn (1Q
FY24: Rs. 4.16 trn)
External Sector:
May 2023 Trade deficit rose to US$22 bn (highest in current calendar year). While
May’23 export & import both contracted, the decline was relatively more in exports. Oil
and gold within exports and imports showed contraction. Net Services exports
continued to grow robustly during Apr-May - helping to bridge up the current
account deficit gap.
4Q FY23 (Jan-Mar) current account deficit (CAD) came down sharply to 0.2% of GDP
(3Q FY23: 2%; 2Q FY23: 3.8%, 1Q FY23: 2.1%). With this, the entire year FY23 CAD came
around 2% of GDP (FY22: 1.2%). While high CAD ratio was matter of concern since start
of year, robust services and NRI flows have helped in bringing down the CAD print
within RBI’s comfort zone (~2% of GDP). FY23 balance of payment (BoP) was negative
at ~ US$9 bn (positive flow of US$47.6 bn in FY22 & US$87.6 bn in FY21). Negative BoP
was primarily due to huge trade drag & flattish capital flows in 2Q.
June 2023 saw robust FPI inflows (both equity and debt) at US$ 6.8 bn – highest since
Aug 2022. 1Q FY24 saw robust inflows of US$14 bn – in sharp contrast to contraction of
FPI flows of ~US$14 bn 1Q FY23.
Rupee was flattish in June, with appreciating bias. Average Rupee stood at 82.23
during the month (May: 82.34; Apr: 82.02; Mar: 82.3). Rupee has appreciated by ~1%
against dollar in CY23 till date.
Yield Levels & Spreads:
G-sec yield remained range-bound during the month with upside bias on tight
monetary policy. June started on positive note with 10 year G-sec trading below 7%.
While RBI’s hawkish tone in policy led to some marginal pickup in yields, it picked up
further post hawkish Fed policy and stayed range-bound thereafter. It was strong
data points globally and hawkish deliberation of global Central bankers towards end
of the month, the yield picked up further to close the month at 7.11% (May end: 6.99%,
Apr: 7.12%, Mar: 7.31%, Feb: 7.43%, Jan: 7.36%).
10-year Term premia (10 yr over 365 days) rose to average 17 bps in June (May: 7 bps,
Apr: 17 bps, Mar: ~10 bps; Feb: 25 bps, Jan: 44 bps).
Like G-sec, SDL yields moved up on domestic & global cues. 10 yr SDL traded in range
of 7.22-7.40% to close the month at 7.38% (May: 7.38%, Apr: 7.46%, Mar: 7.64%; Feb: 7.68%,
Jan: 7.63%). June SDL primary supply was robust at ~Rs.67,900 cr (Apr: Rs. 22,300 cr,
May: Rs. 77,500 cr). The average spread between 10 yr SDL over G-sec eased to 30 bps
during the month (Apr: 38 bps, May: 32 bps).
Like G-sec & SDLs, AAA bonds yields moved up during the month, with 10 yr AAA PSU
moving in the range of 7.36-7.51% to close the month at 7.44% (Apr: 7.50%, May: 7.41%).
Global
Monetary Policy:
June’23 saw global central bankers turning hawkish as against general expectations
of nearing pause. From surprise hike by Reserve Bank of Australia & Bank of Canada
to higher-than-expected hike by Bank of England, the underlying narrative across
globe was of remaining extremely vigilant on inflation. While US Fed paused in
June’23 meeting, its forward guidance was hawkish. (Fed’s DOT plot suggests 2 more
hikes during CY2023).
Inflation:
US inflation eased further and was at 4% – lowest since Apr 2021 - driven down by
favourable base effect and decline in food & fuel prices. Global food prices were in
disinflation for seventh consecutive month, with IMF’s FAO (Food & Agriculture
Organization) food index down by 21%y/y vis-à-vis 23%y/y one year prior. That said,
Inflation trajectory is expected to remain above global central bankers’ comfort level
for most part of CY2023.
Financial Markets:
US treasury yields moved up during the month on hawkish Fed policy and better than
expected hi-frequency growth numbers. After starting the month at 3.61%, the US 10 Yr
Treasury bond yield moved up and were in range of 3.69%-3.85% during the month.
10 yr UST closed the month at 3.81% (Apr: 3.44%, May: 3.648%). Dollar Index appreciated
marginally in June’23. Calendar year till date dollar index has depreciated by ~60 bps.
Market View
- Amid the rising global uncertainty, domestic macros continued to remain resilient. Directionally & qualitatively for external (current account deficit) & internal balances (fiscal consolidation and Capex focus). Inflation still appears to follow a downward trajectory.
- That said, going forward, food price outlook will be determined by monsoon (spatial & temporal) spread, El-Nino impact and govt’s supply measures.
- June’23 saw Global Central Bankers (CBs) focusing back on inflation, as financial sector stability fears recede. CBs are likely to maintain ‘Higher for longer’ stance during CY2023. Back home, RBI is likely to maintain long pause amidst global cues & strong domestic data.
Common Source:
RBI, CEIC, Finance Ministry, US Federal Reserve, JP Morgan CSO, MOSPI, IMF, CGA, CCIL, Bank of
England,
Reserve Bank of Australia, Bank of Canada.
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