Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Improving Macros (Current account balances, Inflation, Fiscal),
Good Monsoon & Front-Loading of Monetary Policy
Jun’25 saw improving current account balances, lower than expected inflation, better
fiscal print and well-spread and higher than normal Monsoon. Front-loading of policy
rate cut to boost credit growth and aid faster transmission of policy rates augur well
to support growth prospects.
While acceleration in crude oil prices raised intermittent concerns, the OPEC decision
to increase supply and decline in war related tensions have helped in reducing
pressure.
India
Monetary Policy:
In the surprise move, the RBI cut the policy rate by 50 bps to 5.5% in early Jun’25 policy
(Consensus: 25 bps cut). Further, RBI changed its stance from ‘Accommodative’ to
‘Neutral’. To support liquidity, the RBI cut the cash reserve ratio (CRR) aggressively by
100 bps to 3% of NDTL (Net demand and time liabilities of banking system). This move
was more surprising than the rate cut action. The bold rate actions of RBI were driven
by strong desire to boost credit growth and thereby domestic economic growth by
providing credit at lower cost and pushing for faster transmission. Benign inflation
outlook provided RBI the requisite space.
Fiscal:
Apr-May 2025 Fiscal deficit stood at record low 0.8% of BE FY26 (Previous yr: 3% of BE).
This was aided by Robust receipts (Revenue receipts + Non-debt capital receipts).
That said, growth in revenue receipts was driven primarily by non-tax revenue, while
tax revenue was resilient at 10%y/y. Further, the direct tax collections has moderated
on refunds and muted collections. On other hand, Expenditure growth was robust at
20%y/y, partially due to favourable base effect and front-loading of expenditure
(especially Capex grew).
After picking up in April-May, GST growth moderated to 6%y/y in June, although 1Q
(Apr-Jun) growth was resilient at 12%y/y.
Inflation:
May 2025 CPI inflation eased to 2.82%y/y (Better than consensus (2.98%y/y) and was
lowest since Feb 19). The lower print was supported by favourable base effect and
muted sequential momentum in food, clothing and housing prices. Core inflation
rose marginally to 4.17%y/y - driven primarily by elevated gold prices. (Avg Mar & Apr
2025: 4.1%y/y).
Liquidity:
Since April, system liquidity has eased substantially, with further improvement
evident in June. Average monthly liquidity improved to Rs. 2.8 trillion in June (Apr: Rs.
1.4 trn; May: Rs. 1.7 trn). This despite no OMOs and additional outflows in form of
advance tax. In June, liquidity was aided primarily by Gsec buybacks and higher
government spending.
The core liquidity remained ample at ~Rs. 6 trn in June (~ May lvls) on seasonally lean
cash demand month.
External Sector:
FY25 Current account balance came in lower at 0.6% of GDP (FY24: 0.7) driven by
robust services and buoyant NRI remittances. FY25 Balance of Payment (BoP),
however, was negative US$5 bn - on drag from banking capital and muted foreign
investment (FDI and FPIs).
May Trade deficit moderated to ~US$22 bn (Apr 25: US$26 bn), on sharp decline in oil
imports. May 2025 net service exports grew robustly at 24%y/y due to resilient
services exports and tepid services imports.
Net FPI inflows turned negative in June 2025 to US$0.9 bn (May 2025: US$3.6 bn) driven
by debt outflows, while equity inflows remained robust.
DXY continued to depreciate for fifth consecutive month, on rising tariff uncertainties.
After appreciating over last three months, INR depreciated in June and stood on
average 85.90 against dollar (Apr: 85.56; May 2025: 85.19). In the calendar year 2025,
the rupee has appreciated marginally by ~0.09%, recouping losses made during
Jan-Feb.
Yield Levels & Spreads:
Jun’25 saw fixed income market yields harden post early June monetary policy.
Although RBI aggressively cut the policy rate, the reduced expectations of future rate
cut pushed the yields higher. Further no OMOs during the month and sharp rise in oil
prices exerted further pressure. 10-year G-sec yields started the month at 6.27% and
moved post policy in range of 6.32%-6.39% (May 2025: 6.24%-6.40%). 10 yr G-sec
closed the month higher at 6.36% (Apr 2025: 6.36%; May 2025: 6.25%).
Like G-sec, 10-year SDL initially started the month on easing bias and moved up post
policy in the range of 6.65%-6.74% during the month (May 2025: 6.57%-6.76%;) and
closed the month higher at 6.73% (Apr 2025: 6.67%; May 2025: 6.61%). June SDL primary
issuances stood at Rs. 82,207 cr (May 2025: Rs. 64,772 cr). The average spread
between 10 yr SDL over G-sec stood at 35 bps during the month (May 2025: 36 bps).
10-year AAA bonds initially was range bound and moved up post policy in range of
6.89%-7.02% (May 2025: 6.85%-7.06%). 10 yr AAA PSU closed the month higher at 7.02%
(Apr 2025: 6.98%; May 2025: 6.85%).
Global
Monetary Policy:
June 2025 saw major global central banks (US Federal Reserve, Bank of England)
keeping policy rates unchanged and preferring data dependent approach. Going
forward, the central banks (CBs) are likely to prefer gradual rate cut cycle on back of
global uncertainties.
Financial Markets:
US 10 Yr Treasury bond (UST) yield moved in the range of 4.24%-4.51% and close the
month lower at 4.24% (Apr 2025:4.17%; May 2025: 4.41%).
Dollar index (DXY) continued to depreciate for fifth consecutive month by 1.7% (Apr
2025: -ve 3.3%m/m; May 2025: -ve 0.58%m/m).
Crude Oil rose sharply by 11%m/m after depreciating in prior four months on war
concerns.
Market View
- Improving domestic macros (Purchasing Manager’s Index (PMI), inflation, trade), lower pressure on currency (weak dollar), muted crude oil outlook are growth and rate supportive. Higher than normal Monsoon (including forecast), front-loading of expenditure (especially capex) provides further cushion. That said, muted credit and industrial production growth despite policy support remains concern
- With 100 bps rate cut done in current cycle (from Feb’25 to Jun’25), the expectation of further actions from RBI is limited as RBI has prioritized front-loading both the policy and liquidity measures and pre-empted liquidity measures for September-December’25 quarter.
- Going forward, Market may become more data dependent and take cues from changes in local growth/inflation data. Global yields, tariff related announcement and global commodity prices may continue to be of interest for local investors.
- System Liquidity is likely to remain ample till Sep’25 on seasonally lower cash demand and lower activity months (due to monsoon). Further, with CRR cut to be implemented in Sep’25 through Nov25, the RBI continues to remain supportive and nimble on liquidity front.
Common Source:
RBI, CSO, FAO, CEIC, NSO, US Federal Reserve, US Treasury department, Commerce Ministry of India, Finance
Ministry of India, NIMF Internal Research
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