Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
India: Robust Economic Growth, Easing Inflation and Better
than Expected Fiscal Consolidation
May’24 saw financial market normalising after sharp repricing
of assets seen in Apr’24. While underlying narrative of slower
and delayed start of rate cut cycle continues, ECB is likely
to make early start. Inflation across globe has been gradually
coming down, while growth data continued to remain resilient.
Hi-frequency indicators for India indicates that Indian
economy continued to grow robustly in FY24, with
better-than-expected fiscal consolidation and easing
inflationary pressure.
India
GDP:
Indian economy grew at robust 8.2%y/y in FY24 (higher than
advance estimates of 7.6%y/y). Economic growth from supply
side grew at 7.22%y/y (Advance estimate for FY24: 6.9%y/y).
The robust growth is projected to be driven by buoyant capex
growth from demand side and industry (construction, mining and
manufacturing) & broad-based robust services growth
(especially Financing, insurance, real estate & business
services and public administration) from supply side. However,
agriculture and consumption (private and government) growth
were muted.
Fiscal:
FY24 fiscal deficit (% of GDP) came in lower at 5.6% as
against downwardly revised 5.8% in revised estimates for FY24.
Better than expected revenue receipts (tax and non-tax) and
muted expenditure growth helped in faster fiscal
consolidation. That said, capital expenditure continued to
grow at higher double-digit indicating improved quality of
fiscal expenditure. In fact, capital expenditure (on avg) has
grown at buoyant ~30%y/y annual over last three years
(FY22-FY24).
Inflation:
In April 2024, CPI inflation marginally eased to 4.83%y/y (Mar
2024: 4.85% y/y, Last year same period: 4.70%y/y), driven down
by favourable base effect and sequential momentum in line with
seasonality. Excluding veggies, headline inflation remained
steady at 3.56%y/y (Previous month: 3.55%y/y; Apr 2023:
5.44%y/y). Core inflation continued to edge down to record low
3.23%y/y (Mar 2024: 3.24%y/y; Last year same period:
5.19%y/y).
External Sector:
April 2024 Trade deficit rose to US$19.1 bn (March 2024:
US$15.5 bn; Apr 2023: US$14.4 bn; & slightly lower than
monthly average FY24: ~US$20bn). Higher imports (crude and
gold) resulted in higher trade deficits. Although net services
exports have moderated in absolute terms since February 2024,
overall net services grew robustly at 16%y/y.
After the robust inflows in Feb-March, FPI flows contracted in
April and May. While May 2024 saw outlook of US$1.5 bn,
outflows were primarily from equity (US$3 bn) ahead of
election outcome and on global cues. Debt market saw positive
FPI inflows (US$1 bn) after witnessing outflows in April ahead
of JP Morgan bond inclusion. That said, CY2024 saw overall
robust inflows in first five months to the tune of US$6 bn,
driven primarily by debt inflows (US$6.4 bn).
On back of depreciation of dollar, average Rupee remained
largely flattish in May 2024 and stood at 83.39 against dollar
during the month (Apr 2024: 83.41).
Liquidity:
Banking system liquidity was tight during the month (avg -ve
Rs 1. 5 trn) as against flattish liquidity in April (which
typically is seasonally easy month). That said, lower T-bill
issuances (Rs.20,000 cr) and G-sec buybacks (Rs. 23,000 cr)
during the month helped in improving the liquidity, despite
seasonally high cash demand. Government balances continued to
remain robust and stood on an average ~Rs. 3.5 trn (excluding
RBI dividend avg Rs. 2.75 trn) during May 2024 (Apr 2024: 1.8
trn). As a result of huge RBI dividend, Core liquidity (system
liquidity + Government balances) increased sharply from Rs.
1.5 trn at April end to ~Rs. 3.6 trn by May end.
Yield Levels & Spreads:
While Indian fixed income market yields rose in Apr’24
reflecting the global trends, the rise in Indian G-sec (IGB)
yield was relatively limited. Since March end, the G-sec yield
curve has moved in range of 15-20 bps, while impact on
corporate bond was relatively muted (in range of 10-14 bps
across curve). This vis-à-vis global trends of 20-40 bps since
global asset price repricing during the month.
In May 2024, 10-year G-sec yield moved in the range of
6.98-7.16% during the month. 10 yr G-sec closed the month
lower at 6.99% (Apr 2024: 7.20%; March 2024: 7.05%; February
2024: 7.08%; January 2024:7.14%). Average 10-year term premia
eased to average~4 bps during the month (Apr 2024: 13 bps).
Taking cues from G-sec, 10-year SDL yields eased during the
months (range of 7.35-7.45%) to close the month higher at
7.40% (Apr 2024: 7.47%). May’24 SDL primary issuances stood ~
Rs.42,800 cr (Apr 2023: Rs. 51,200 cr). The average spread
between 10 yr SDL over G-sec rose to 34 bps during the month
(Apr 2024: 29 bps).
Like G-sec and SDLs, AAA bonds eased during the month with 10
yr AAA PSU moving in the band of 7.46%-7.58% (Previous month:
7.52%-7.59%). It closed the month lower at 7.46% (Apr 2024:
7.56%).
Global
Inflation:
US inflation eased marginally to 3.4%y/y in April 2024 (Mar
2024: 3.5%y/y; Feb 2024: 3.2%y/y; Jan 2024: 3.1%y/y); while
core inflation eased a bit to 3.6%y/y (Apr 2024: 3.8%y/y).
Sequential growth of headline & core inflation continued to
remain high at 30 bps driven by sticky core services. Global
food prices continued to remain in disinflation for seventeen
consecutive months, (with IMF’s FAO food index down to
negative 7.5%y/y in Apr 2024 vis-à-vis -ve 21.5%y/y one year
prior). Oil prices decreased sharply by 9%m/m in May 2024,
after rising 5% m/m in Apr, with May’24 brent prices hovered
on average ~ US$81.75barrel (Jan 2024: US$80/barrel, Feb 2024:
US$83.5/barrel; Mar 2024: US$85.41/barrel; Apr 2024: US$
89,9/barrel) on demand concerns.
Monetary Policy:
Resilient economic data, relatively tight labour market, high
crude prices pickup in sequential momentum of headline
inflation and sticky core services and expansionary fiscal
policy have resulted in postponement of start of rate cut
cycle and cutting down of market expectations of overall cut.
US Fed Reserve Chairman Powell, in his early May’24 Fed
meeting, has clearly indicated that monetary easing might take
longer than initially indicated. Amongst the advance
economies, only ECB has indicated that they might start policy
easing from June onwards.
Financial Markets:
During May’24, US treasury yields eased during the month after
mixed economic data, easing inflation, easing crude prices and
depreciating dollar index. US 10 Yr Treasury bond (UST) yield
were volatile and moved in the range of 4.36-4.63% and closed
the month lower 4.51% (Apr 2024: 4.69%). Dollar Index
depreciated by 0.45% in May (Apr 2024: +ve 1.54%; CY2024 YTD:
+ve 3.9%) on rising global uncertainty.
Market View
- While Inflation has been trending downwards in recent months and is expected to ease further in FY25, the strong domestic growth, high oil prices, global geo-political uncertainty and postponement of rate cut cycle by major global central bankers have put RBI on hold.
- Going forward, the RBI rate cut cycle size and timing may be influenced by evolving domestic inflation outlook along with global policymakers’ actions timeline. We believe RBI to cut the rates in 2H (Aug/Oct) of calendar year.
- Better than expected FY24 fiscal performance (driven by robust revenues and muted expenditure growth) has raised the expectations of faster fiscal consolidation in FY25 - aided by more than anticipated RBI dividend. This in turn have raised the expectations of lower gross borrowing than budgeted for FY25. Already, government has cut down on 1Q FY25 T-bill issuance calendar.
Common Source:
RBI, CSO, FAO, CEIC, NSO, JP Morgan, US Federal Reserve,
US Treasury department, Commerce Ministry of India, NIMF
Internal Research.
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