Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Strong domestic growth, moderating inflation print, narrowing
trade deficit and gradual fiscal consolidation.
India’s economic data came in strong for FY23 and hi-frequency indicators signals
buoyant momentum continues into current quarter. Gradual Fiscal consolidation,
along with moderating inflation and narrowing trade deficit were key highlights of the
month. Globally, more and more Central Banks turning data-dependent and rise in
concerns related to US Debt ceiling were key events.
India
Growth:
4Q FY23 GDP came in strong at 6.1%y/y (3Q FY23: 4.5%y/y and better than
expectations) indicating robust growth momentum – driven by buoyant capex and
net export growth from demand side and broad-based supply side growth
(agriculture, industry and services). As a result, FY23 GDP growth was revised up to
7.2%y/y (advance estimate :7%y/y). The improvement in estimates was broadly
driven by agriculture, manufacturing and construction sector from supply side, while
investment spending and lower net exports proved to tailwinds from demand side.
Hi-frequency indicators including PMI, GST collections indicates that growth
continues to remain robust in current quarter.
Inflation:
April saw headline CPI inflation print coming below 5% mark – first time since Oct 2021.
From 5.7% y/y in Mar 2023, CPI eased to 4.7%y/y (in line with consensus). The sharp
decline in headline print was driven by favourable base effect and sequential
increase in line with seasonality. Core inflation declined to 5.19%y/y in April (March
2023: 5.78%y/y; 2H FY23 avg: 6%; Lowest since May 20), although favourable base
effect helped. Going forward, May-June print are likely to be below 5% mark aided by
favourable base effect.
Monetary Policy:
In early June meeting, the RBI left policy rate & stance unchanged. This was in line
with consensus expectations. Like April policy, RBI reiterated the future rate actions
will be data dependent. 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).
Fiscal:
FY23 fiscal deficit came in line with revised budget estimates. While there was some
improvement in revenue collections, higher capex and marginally lower nominal GDP
print kept the fiscal deficit at 6.4% of GDP. Although there was shortfall (~1 trn) from
budgeted sources, the gap was met by unconventional sources like borrowing from
RBI (WMA & cash balance drawdown).
April 2023 saw net tax revenue collection contracting by ~14%y/y driven down mainly
by moderation in gross tax collections and higher transfers to states. Unlike last year,
expenditure growth was robust at ~11%y/y driven by revenue expenditure. That said,
GST collections in April was record high, while it continued to remain robust at 11.5%y/y
in May indicating robust demand.
RBI Dividend:
RBI balance-sheet rose by muted 2.5%y/y (FY22: 8.5%y/y) on account of sharp decline
in surplus funds (reverse repo) parked by banks with RBI. That said, High double-digit
increase in income in form of interest income (sharp rise in yield) and forex income
(RBI’s forex intervention) led to buoyant surplus/dividend generation for Central
Government (~Rs. 87,000 cr vis-à-vis ~Rs. 30,000 cr in FY22).
External Sector:
April 2023 Trade deficit narrowed to US$15.2 bn (Lowest since Aug 2021, 4Q FY23
Average:US$17 bn). While April export & import both contracted on the seasonality, the
decline was much sharper in imports (oil, gold and core). Net Services exports
continued to remain robust at US$12.2 bn during the month - helping to bridge up the
current account deficit gap.
FY24 started on good note, with net inflow of ~US$2 bn in Apr and ~US$6 bn (4Q FY23:
net outflow of US$3 bn; FY23: net outflow of US$5.5 bn). After appreciating for two
consecutive months, rupee depreciated marginally. Average Rupee was 82.34 during
the month (Apr: 82.02; Mar: 82.3). Rupee has appreciated marginally against dollar in
CY23 till date.
Yield Levels & Spreads:
In early May US Federal Reserve policy meeting, Fed tweak the forward guidance to
indicate that the central bank is likely to maintain status quo going forward. This led
to rally early in the fixed income market and yield remained range-bound thereafter.
G-sec yields eased at the start of the month with 10-year G-sec easing from 7.11% at
the start of the month to ~7% lvls post Fed policy and moved in the range of
6.96%-7.05% during the month. It closed the month at 6.99 % (Apr : 7.12%, Mar: 7.31%, Feb:
7.43%, Jan: 7.36%).
10-year Term premia (10 yr over 365 days) eased to average of ~7 bps during the
month (Apr: 17 bps, Mar: ~10 bps; Feb: 25 bps, Jan: 44 bps).
Like G-sec, SDL yields eased across the curve on global cues. 10 yr SDL traded in range
of 7.28-7.47% to close the month at 7.32% (Apr: 7.46%, Mar: 7.64%; Feb: 7.68%, Jan: 7.63%).
May SDL primary supply was robust at ~Rs.77,500 cr (Apr: Rs. 22,300 cr, Mar: Rs. 1,39,000
cr, Feb: ~Rs. 84,000 cr, Jan: ~Rs. 78,000 cr). The average spread between 10 yr SDL over
G-sec eased to 32 bps during the month (Apr: 38 bps, Mar: 32 bps, Feb: 25 bps, Jan: 23
bps).
Like G-sec, AAA bonds yields eased during the month, with 10 yr AAA PSU moving in the
range of 7.36-7.50% to close the month at 7.41% (Apr: 7.50%, Mar: 7.69%, Feb: 7.77%, Jan:
7.64%).
Global
Monetary Policy:
After raising rates sharply since March 2022, US Fed raised the policy rate by 25 bps
to 5.25% (total hike in cycle: 500 bps) early May. The revised forward guidance stated
that the future actions would become data dependent as the central bank assess
the lagged effect of monetary tightening as well as developments in the regional
banking sector. Bank of England & ECB have reduced the pace of rate increase to 25
bps in May meetings.
Inflation:
US inflation eased marginally and were below 5% mark – lowest since Apr 2021 driven
down by favourable base effect and decline in food & fuel prices.
Global food prices were in disinflation for sixth consecutive month, with IMF’s FAO
food index down by 20%y/y vis-à-vis 30%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 initially eased on dovish US Fed policy, but in second half of the
month rose on US debt ceiling concerns raising the fears of sovereign debt default.
After starting the month at 3.59%, the US 10 Yr Treasury bond yield eased to 3.38% post
Fed policy and were range bound (3.37%%-3.57% in first half of the month, only to
move up in second half (in range of 3.65%-3.83%) on concerns on no breakthrough
on US debt ceiling issue. Only deal at the end of month helped in closing the month
lower at 3.64% (Apr : 3.44%, Mar: 3.48%, Feb: 3.92%, Jan: 3.52%). Dollar Index
appreciated by ~1% in May on debt default concerns. Calendar year till date dollar
index has appreciated by ~80 bps.
Market View
- More and more Central Banks globally have switch to data-dependent mode for future policy actions.
- While domestic growth-inflation-external balance has improved sharply, global dynamics are not giving RBI comfort to change its stance or indicate rate cut cycle in near future. Over the next 6 months to 1 year period, we expect clarity on same, which in turn might nudge RBI to normalize the policy rate. We believe RBI’s rate cut cycle to start in 4Q FY24 or in 1Q FY25.
- Rate easing outlook (over next 12 months) and improved system liquidity likely to result in curve steepening. In such backdrop, Low duration, Intermediate duration funds (1 to 3 years) like Short term fund, Corporate bond fund and Banking & PSU fund seems attractive from investment perspective. Selective credit allocation within this space could provide further cushion.
Common Source:
RBI, CSO, FAO, CEIC, JP Morgan, US Federal Reserve, Bank of England, US Treasury department, ECB,
Commerce Ministry of India, Union Budget FY24.
Disclaimer:The information herein is meant only for general reading purposes and the
views being expressed only
constitute opinions and therefore cannot be considered as guidelines, recommendations or as a
professional guide
for the readers. The document has been prepared based on publicly available information, internally
developed data
and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of
their directors,
employees, associates or representatives (“entities & their associates”) do not assume any
responsibility for, or
warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this
information are
advised to rely on their own analysis, interpretations & investigations. Readers are also advised to
seek independent
professional advice in order to arrive at an informed investment decision. Entities & their associates
including persons
involved in the preparation or issuance of this material shall not be liable in any way for any direct,
indirect, special,
incidental, consequential, punitive or exemplary damages, including on account of lost profits arising
from the
information contained in this material. Recipient alone shall be fully responsible for any decision
taken based on this
document