Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Robust Growth, improving domestic Inflation Dynamics, on-track
fiscal consolidation and improving external balances.
Better than expected domestic growth outlook (supported by
hi-frequency data), easing headline and core inflation
pressure, clear roadmap for rapid fiscal consolidation and
manageable external balances were key macro data-points for
Indian fixed income markets during the month (Feb’24)
India
Economic Growth:
Second advance estimates of National Statistical Office (NSO),
released Feb end, revised up FY24 growth estimate to 7.6%y/y
(Previous estimate: 7.3%y/y & higher than RBI’s expectations
of 7% y/y). Economic growth from supply side grew at 6.9%y/y
(FY23: 6.7%y/y). The robust growth is projected to be driven
by double-digit capex growth from demand side and industry
(construction, electricity and manufacturing) & broad-based
robust services growth (especially trade, hotels,
transportation) from supply side. Agriculture and private
consumption growth were muted.
Inflation:
In January 2024, CPI inflation eased to 5.10% y/y (Dec 2023:
5.69% y/y, Last year same period: 6.52%y/y), driven down
primarily by favourable base effect and broad-based easing in
sequential momentum. Excluding vegetables, headline inflation
eased to 3.91%y/y (Previous month: 4.48%y/y; January 2023:
7.69%y/y). This is lowest level since Nov 2019. Core inflation
continued to edge down to record low 3.59%y/y (December 2023:
3.89%y/y; Last year same period: 6.10%y/y).
Monetary Policy:
In February 2024 meeting, RBI retained status quo on policy
rate and stance – in line with market expectations. (It has
been one year since policy rate was last hiked). While the
inflation has gradually come down over the period, it is still
above RBI’s medium-term target of 4%. This, in addition to
robust domestic growth outlook, rising geopolitical
uncertainty, cautious global central bankers’, volatility in
domestic food inflation trajectory kept RBI cautious on
overall inflation outlook. RBI has revised downward FY25
inflation projections, while being bullish on growth outlook.
Further, as against the market expectations for easing system
liquidity, RBI only promised to actively manage liquidity -
with no concentrate measures announced.
Fiscal:
April-Jan 2023-24 gross & net tax collections grew robustly by
14.5%y/y and 11.3%y/y respectively - driven by buoyant direct
tax collections. Expenditure growth was muted at ~6%y/y driven
down primarily by almost flattish revenue expenditure. That
said, capital expenditure continued to grow at higher
double-digit. As a result, Fiscal deficit stood at ~64% of
budget estimates (Previous year similar period: 68%). February
GST data continued to indicate buoyant tax collections
(Apr-Feb FY24: 11.5%y/y).
External Sector:
January’24 Trade deficit eased to ~US$17.5 bn (monthly average
Oct-Dec 2023: ~US$23bn, July-Sep 2023:US$21 bn, Apr-Jun 2023:
US$18.7 bn)) driven down mainly by contraction in imports
(especially non-oil non-gold). Net services exports grew
robustly at 23%y/y (Apr-Jan 2023-24 growth:17%y/y).
After marginally contracting in January 2024, FPI inflows rose
robustly by ~US$4 bn in February 2024, with more than 70%
inflows in debt. With this, Apr-February FY24 saw overall
strong inflows of ~US$35 bn (Equity: US$21 bn; Debt:US$13 bn).
Post bond inclusion announcement, the flows in debt have
picked up with Oct-Feb 2023-24 flows to the tune of US$10 bn.
On back of strong dollar, average Rupee was marginally
depreciated against US dollar in February 2024 and stood at
83.96 during the month (Jan: 83.12). Rupee has appreciated by
~1% in FY YTD (Apr-February 2023-24).
Liquidity:
February 2024 saw core liquidity (system liquidity +
Government balances) declined from daily average of 2 trn in
January to ~1.7 trn in February, on back of seasonally high
cash demand & credit pick-up. Negative System liquidity eased
in February (daily average -ve Rs. 1.9 trn) as against daily
average of -ve Rs. 2.1 trn in January 2024.
Yield Levels & Spreads:
Fixed income yields ease during the Feb’24 - driven by faster
than expected fiscal consolidation, lower than expected FY25
gross borrowings number and easing monthly inflation print.
10-year G-sec yield moved in the range of 7.05-7.11% during
the month. 10 yr G-sec closed the month lower at 7.08%
(January 2024:7.14%, Dec 2023: 7.18%, Nov 2023: 7.28%). While
money market rates eased a bit during the month on government
spending, relative faster easing of yields in benchmark, the
10 year term premia was flattish to small negative.
Taking cues from Gsec, 10-year SDL yields eased a bit and
remained range-bound during the month (range of 7.41-7.54% to
close the month lower at 7.43% (Jan 2024: 7.45%). February SDL
primary supply continued to remain high at Rs.1,06,259 cr
(January 2024: Rs. 1,04,521 cr). The average spread between 10
yr SDL over G-sec eased to 37 bps during the month (January
2024: 48 bps).
In Feb’24, AAA bonds eased during the month with 10 yr AAA PSU
moving in the band of 7.54%-7.58% (Previous month:
7.65%-7.74%). It closed the month lower at 7.54% (Jan 2024:
7.63%).
Global
Monetary Policy:
February-24 saw global central bankers’ sounding cautious on
early rate cut cycle and preferred to remain on hold before
evidencing sustainable decline in inflation. In case of US,
strong growth print (non-farm numbers, GDP, PMI etc) and
pick-up inflation momentum has made FOMC members extra
cautious.
Inflation:
US inflation eased to 3.1%y/y in February 2024 (Jan 2024:
3.4%y/y). Sequential growth in headline was higher at 30 bps
driven by food, fuel and core services (Read: Shelter). Global
food prices continued to remain in double-digit disinflation
for fourteen consecutive months, (with IMF’s FAO food index
down to negative 10.3%y/y in January 2024 vis-à-vis -ve
3.1%y/y one year prior).. Oil prices continued to rise for
second month in row and average ~US$ 83.5/barrel (Jan 2024:
US$80/barrel), on supply concerns (Red Sea issue, middle east
war etc)
Financial Markets:
During Feb’24, US treasury yields rose during the month on
revised down expectations on rate cut in 2024; expectations of
rate cut shifting to later part of year, strong non-farm
employment data, higher-than-expected monthly inflation print
and pickup in core inflation. US 10 Yr Treasury bond (UST)
yield moved in the range of 3.87-4.33% and closed the month
higher at 4.25% (January 2024: 3.99%). After appreciating in
January, Dollar Index appreciated further by 1.14% in February
2024 (CY2024 YTD: 2.8%).
Market View
- RBI left policy rate unchanged in February 2024 policy. 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 may cut the rates in second half of the calendar year 2024.
- Core inflation came below 4% in Dec-Jan 2023-2024 and expected to remain muted in Feb-March 2024 helped by favourable base effect and muted sequential momentum.
- Policymakers clear intend to adhere to medium term fiscal trajectory (4.5% by FY26), without any compromise on quality of expenditure (i.e capex focus) indicates fiscal support is likely to be non-inflationary and medium-term growth supportive.
- Better than expected growth numbers, moderation in inflation and improving external balances provides RBI leeway to hold rate for longer, while assessing global uncertainty.
- Currently, the curve is very flat in both corporate and G-secs. Going forward, we expect curve steepening bias likely to prevail in run-up to RBI rate cut. This may benefit short to intermediate duration funds. Absolute fall in yields may provide capital gains to long duration funds.
Common Source:
RBI, CSO, FAO, CEIC, NSO, JP Morgan, US Federal Reserve,
US Treasury department, Commerce Ministry of India, NIMF
Internal Research.
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.