Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
US-China Trade Deal, RBI’s Aggressive Rate Cut, Robust GDP
Growth, Record High RBI Dividend and Fiscal Consolidation
May’25 saw de-escalation of US-China trade war on trade deal, which brought down
the tariff rate sharply between the two countries. The deal provided template for
more trade deals with other countries and reduce the risk of exorbitantly high US tariff
rate and its fallout on trade, growth and inflation.
Back home, FY2025 economic growth was robust at 6.5%y/y, while FY25 fiscal deficit
came marginally better than budgeted. Inflation continued decline and was closer to
3% mark, while system liquidity continued to improve robustly aided by RBI’s OMOs.
May’25 also saw sharp rise core system liquidity (banking system liquidity + Govt
balances) on record high RBI dividend. Aggressive policy rate cut and CRR rate cut by
RBI will provide further boost to economic growth and reduce the need for OMO
auctions.
India
Monetary Policy:
In the surprise move, the RBI cut the policy rate by 50 bps to 5.5% in early June policy
(Consensus: 25 bps cut). This is unlike the RBI’s norm of taking baby steps (25 bps
incremental change). 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 arguably even more surprising than the rate cut move. 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. Benign inflation outlook provided
the requisite space.
Growth:
4Q FY25 grew buoyantly at 7.4%y/y (Prior quarter: 6.4%y/y) driven by capex and
degrowth in imports. Indian economy grew at 6.5%y/y in FY25 (Previous year: 9.1%y/y)
driven by robust private consumption, buoyant capex and support from net exports.
From supply side, GVA growth was resilient at 6.4% y/y in FY25 (Prior yr: 8.6%y/y) driven
by strong agriculture, construction and public administration growth.
Fiscal:
FY25 Fiscal deficit came in marginally better than revised estimate (RE) at 4.77% of
GDP (Revised estimate: 4.84%y/y) and ~FY20 lvls. Improvement in the fiscal deficit
was achieved through a). Higher Nominal GDP print at Rs. 331 trn (RE estimate: Rs.
324 trn); b). Lower revenue expenditure than RE. However, capital expenditure
continued to grow at 11%y/y (Better than RE: 7.4%y/y).
Latest trend indicates that the Apr 2025 Fiscal deficit was modest at 12% of BE FY26
(~ previous yr lvls). 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 muted. Expenditure growth was modest at
10%y/y, partially due to adverse base effect and contraction of revenue
expenditure. Capex grew at higher double digit indicating better quality of
expenditure.
Further, after growing at muted 9.6%y/y in FY25, GST growth pick up in the current
financial year, with GST growing at 16% plus y/y in May. (In fact, for the last three
months, monthly avg GST inflows has been robust at ~ Rs. 2 trn).
Inflation:
April 2025 inflation eased to six years low at 3.16%y/y (Mar 2025: 3.34%y/y; Apr 2024:
4.83%y/y). Monthly print was better than consensus (3.2%y/y) and lowest since Jul
2019. Decline in the monthly print was driven by favourable base effect and
contraction in food prices. Core inflation remained steady at 4.1% lvl during the
month - driven by housing and personal care (Read: Gold).
Liquidity:
After remaining negative since December 2024, system liquidity eased substantially
over the last two months with average monthly liquidity improving to ~ Rs.1,70,000 cr
in May 2025 from average ~ Rs. 142,000 cr in April. RBI’s aggressive OMO auctions
(Apr-May 2025: Rs. 1.2 trn; Jan-May 2025: Rs. 5.2 trn) and seasonally high govt
spending in April-May improved system liquidity to ample.
From Rs. 2.3 trn at April end, the core liquidity improved sharply to Rs. 6 trn by third
week of May 2025 (~2.5% of NDTL) on record high RBI Dividend.
External Sector:
April Trade deficit increased to ~US$26 bn (March 25: US$22 bn), on robust imports (oil
and core imports), while core exports grew modestly. April 2025 net service exports
grew robustly at 19%y/y due to resilient services exports and tepid services imports.
After remaining negative in April on US trade policy shock, Net FPI inflows turned
positive in May 2025 to US$3.6 bn (both debt + equity) on decline in global
uncertainty and reduce geo-political risks.
DXY continued to depreciate, albeit marginally for fourth consecutive month. With
reduced pressure, INR continued to appreciate in May’25 and stood on average 85.19
against dollar (Apr: 85.56; Mar 2025: 86.64). Since start of CY25, rupee has
appreciated marginally by ~0.17%, recouping losses made during Jan-Feb.
Yield Levels & Spreads:
Fixed income market yields eased during the month of May’25 on lower than
expected Apr’25 inflation print & improving inflation outlook, declining crude prices,
depreciating dollar and RBI’s aggressive OMOs. 10-year G-sec yields moved in the
range of 6.24%-6.40% during the month (Apr 2025: 6.32%-6.50%). 10 yr G-sec closed
the month lower at 6.25% (Apr 2025: 6.36%).
Like G-sec, 10-year SDL eased and moved in range of 6.57%-6.76% during the month
(Apr 2025: 6.67%-6.94%;) and closed the month lower at 6.61% (Apr 2025: 6.67%; Mar
2025: 6.96%). May SDL primary issuances stood at Rs.64,772 cr (Apr 2025: Rs. 53,870 cr).
The average spread between 10 yr SDL over G-sec stood at 36 bps during the month
(Apr 2025: 27 bps; FY25 average: 35 bps).
10-year AAA bonds moved in narrow range (6.85%-7.06%) during the month (Apr
2025: 6.96%-7.08%). 10 yr AAA PSU closed the month lower at 6.85% (Apr 2025: 6.98%;
Mar 2025: 7.17%).
Global
Easing of Trade Uncertainty:
After sharp rise in global uncertainty in April due to US trade policy, the month saw
decline in trade related uncertainty due US China and US-UK trade deals thereby
easing concerns related the US tariffs
Monetary Policy:
May 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
sharp rise in global uncertainties.
Financial Markets:
US Treasury bond (UST) yields moved up during the month on sharp rise in US fiscal
deficit concerns. US 10 Yr Treasury bond (UST) yield moved in the range of 4.17%-4.58%
and close the month higher at 4.41% (Apr 2025:4.17%; Mar 2025: 4.23%).
After appreciating sharply from Oct’25 through January, the dollar index (DXY)
continued to depreciate for fourth consecutive month, albeit marginally. DXY
depreciated by 0.58% (Apr 2025: -ve 3.3%m/m; Mar 2025: -ve 3%m/m; Feb 2025: -ve
1.3%m/m). Crude Oil depreciated further by 3%m/m in May 2025 after depreciating
~5% m/m during Feb-Apr 2025.
Market View
- US-China trade deal resulted in easing of US trade policy related concerns, although uncertainty remains. While the concerns related to outright US recession have come down, there is general expectations that the global growth may be below potential, and the policy makers will need to be growth supportive.
- US-China trade deal resulted in easing of US trade policy related concerns, although uncertainty remains. While the concerns related to outright US recession have come down, there is general expectations that the global growth may be below potential, and the policy makers will need to be growth supportive.
- Market may become more data dependent in future 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
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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