Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Resilient Growth, Monetary Easing, Nimble Liquidity
Management & Moderating Inflation risks
The month saw sharp rise in geo-political risk/uncertainty driven primarily by
concerns around US tariffs - with implication on growth, capital flows and currency. In
fact, US impose 10% tariff on China in February 2025 itself. That said, crude oil, UST and
DXY depreciated during the month supporting global financial markets. Going
forward, the major central banks will continue to adopt gradual easing path - driven
by the domestic factors as well as global concerns.
In India, the month saw growth supportive and fiscally prudent fiscal policy, start of
monetary policy easing and easing inflationary pressures. While RBI continue to
intervene in forex market, RBI simultaneous provided liquidity- easing measures
(temporary + durable) to support liquidity. While FY25 growth moderated to 6.5%y/y,
it came in backdrop of upwardly revised 9% plus growth in previous year.
India
Economic Growth:
3Q FY25 (Oct-Dec 2024) GDP growth came in line with consensus expectations at
6.2%y/y, driven by consumption (private and government) and net exports. In the
second advance estimate, National Statistics Office (NSO) revised upward FY25 GDP
growth estimate by 10 bps to 6.5%y/y. There was sharp upward revision in prior two
years’ GDP print (FY23 & FY24 at 7.61%y/y & 9.2%y/y as against prior estimate of
6.99%y/y & 8.15% y/y respectively).
Monetary Policy:
In the February 2025 policy, the RBI cut the policy rate by 25 bps, while keeping stance
neutral. The move was in line with the consensus. In the policy, RBI projected Indian
economy to grow at 6.7%y/y in FY26, while it estimated inflation at 4.8%y/y and
4.2%y/y in FY25 and FY26 respectively. In his statement, RBI governor asserted to use
flexibility embedded in inflation targeting framework to improve macro-economic
outcomes. Press conference and Policy minutes were dovish, clearly indicating
growth has taken central stage, while inflation align with the medium-term target.
Liquidity:
After turning negative in Dec 2024 (-ve Rs. 65,000 cr) and deteriorated further in
January (-ve Rs. 2 trn), the system liquidity improved modestly to -ve average Rs. 1.63
trn in Feb 2025. Further, from the peak of +ve Rs. 4.9 trn at the start of Oct, the core
liquidity (system liquidity + Government balances) has sharply declined to ~Rs.72,000
cr by Dec end and -ve Rs. 57,000 cr by mid-January. Reason: Along with seasonal
demand for cash, RBI’s aggressive intervention in forex market (spot + forward), to
support INR, has drained down the liquidity. Core liquidity improved to positive
Rs.18,000 cr by Feb - on RBI’s infusion of liquidity.
Since December 2024, RBI has infused huge amount of money to support liquidity
(From transitory measures like long maturity variable rate repo (VRRs) and daily VRR
auction to durable measures like Open market operation (OMO), FX swaps and cash
reserve ratio (CRR) cut).
Inflation:
CPI inflation eased to 4.31%y/y in January 2025 (Dec 2024: 5.22% y/y, Last year same
period: 5.10%y/y). This was much better than the consensus (4.6%y/y). Although the
base effect was adverse, the sequential decline in monthly food (read: vegetables,
pulses, sugar) and muted momentum in clothing prices helped in bringing down the
inflation. Core inflation rose up to 3.66%y/y (Dec 2024: 3.58%y/y); Last year same
period: 3.59%y/y). Excluding vegetables, headline inflation rose to 3.79%y/y (Previous
month: 3.67%y/y; Jan 2024: 3.91%y/y).
Fiscal:
April-Jan 2024 gross tax receipts grew by ~10%y/y - driven by robust direct tax
collections and flattish indirect taxes. However, net tax receipts growth was muted on
account of record front-loaded devolution to states. Record high RBI dividend
resulted in sharp spike in non-tax receipts. During same period, expenditure growth
grew in line with revised estimate. While the revenue expenditure improved YTD,
capex has picked up recently. As a result, Fiscal deficit stood at 75% of budget
estimates (Previous year similar period: 64%). February GST growth was muted
9.1%y/y at Rs. 1.84 trn and Apr-Feb FY25 GST growth was muted at 9.4%y/y.
External Sector:
Jan Trade deficit rose to ~US$23 bn (Dec 24: US$22 bn), on muted exports. While the
Apr-Jan 2024-25 exports growth was muted due to drag from oil exports, core
exports (excludes oil and gold) grew at resilient ~10%y/y. Similarly, import growth was
modest at 5.6%y/y driven by muted core import growth. Jan 2025 net service exports
grew robust at 11.5%y/y and Apr-Jan 2024-25 growth was buoyant 12.5%y/y.
Net FPI outflows continued into Feb, albeit at lower level. After witnessing huge
outflows in Jan 2025 (US$9 bn), February witnessed net FPI outflows (~US$3 bn) driven
by equity. With this, Apr 2024-February 2025 witnessed tepid US$1.1 bn inflows (mainly
through debt) driven by global cues.
While global cues like UST, DXY, crude eased during February, sharp rise in global
uncertainty and Trump tariff continued to put pressure on currency for fifth
consecutive month and INR depreciated by ~1% during the month. In February, Rupee
stood on average 87.05 against dollar (Jan 2025: 86.64; Dec 2024: 84.99; Nov: 84.36;
Oct: 84.03; Sep: 83.81). YTD FY25 rupee has depreciated by ~4.3%, with major
depreciation occurring during Dec-Feb period (~3.4%)
Yield Levels & Spreads:
Fixed income market yields were range-bound during the month. While the RBI rate
cut, supportive fiscal policy, easing monthly inflation pressure and huge RBI OMO
purchases supported yields, the sharp rise in global uncertainty, FPI outflows,
currency pressure kept yields range-bound in Feb 2025. 10-year G-sec yields moved
in the range of 6.66%-6.72% during the month (Jan 2025: 6.68%-6.84%;). 10 yr G-sec
closed the month marginally higher at 6.72% (Jan 2025: 6.69%). Average 10-year term
premia increased to average~16 bps during the month (Jan 2025: 9 bps).
Like G-sec, 10-year SDL was range-bound (7.05%-7.15%) in February (similar to
7.05%-7.14% in December/January) and closed the month higher at 7.15% (Jan 2025:
7.09%). February SDL primary issuances stood higher at Rs.1,22,593 cr (Jan 2025: Rs.
86,944 cr). The average spread between 10 yr SDL over G-sec stood at 40 bps during
the month (Jan 2025: 36 bps; Apr-Feb FY25 average: 34 bps).
AAA bonds were range bound for most part of the month, only to increase towards
the end of the month. 10 yr AAA PSU moved in the range of 7.22%-7.29% for most part
of the month (Previous month: 7.22%-7.32%). But it closed the month higher at 7.7.39%
(Jan 2025: 7.22%; Dec 2024: 7.20%; Nov 2024: 7.31%).
Global
Monetary Policy:
February saw global central banks’ actions/views driven by domestic requirements.
While Bank of England cut the policy rate, US FOMC minutes indicated strength in
economy, rising uncertainty and concerns on tariff to keep policy rate unchanged in
January meeting. The minutes reiterated no rush to cut and preference for
maintaining data dependent approach. Like US Fed, the policy outlook of most
Central Banks (CBs) is expected to remain data-dependent, and CBs are likely to
prefer gradual rate cutting cycle on back of sharp rise in global uncertainties.
Financial Markets:
US Treasury bond (UST) continued to ease in Feb supported by muted growth
prospects, declining crude oil prices (~ -ve 5%m/m) and depreciating DXY (dollar
index). US 10 Yr Treasury bond (UST) yield moved in the range of 4.4%-4.62% for major
part of the month (as against 4.52%-4.79% in Jan 2025) and eased sharply thereafter
to close the month lower at 4.24% (Jan 2025: 4.58%, Dec 2024: 4.58%, Nov end: 4.18%;
Oct end: 4.28%; Sep 2024: 3.81%).
After appreciating sharply from Oct through January, the dollar index (DXY)
depreciated by 1.3%m/m in February 2025.
Market View
- Economic growth is expected to have mean reverted \ in FY25, with expectation to grow around similar levels in FY26, despite sharp rise in global uncertainty and rising tariff concerns.
- That said, consumption boost via tax cut yet fiscally prudent Budget and RBI’s dovish monetary policy is likely to bode well with growth-inflation dynamics and thereby may be positive for fixed income yields. Further RBI’s assurance to ensure orderly liquidity conditions provides further comfort.
- Market continues to remain positive on duration due to RBI’s aggressive OMO (Open Market Operations) auctions.
- Going forward, the market focus will shift to the US Federal Reserve Policy mid-March 2025 (inflation/ growth projections) and RBI’s Apr 2025 policy. Further, the market will take cues from 1H FY26 G-Sec auction calendar and 1Q FY26 SDL and T-bill auction calendar
- Going forward, US tariff related announcement, movement in DXY and UST (Dollar Index & United States Treasury) along with global uncertainty is likely to have major implications on India’s inflation, RBI’s currency & rate management and core system liquidity trajectory. That said, RBI is likely to remain liquidity supportive.
Common Source:
RBI, CSO, FAO, CEIC, NSO, US Federal Reserve, US Treasury department,
Bank of England, Commerce Ministry
of India, Finance Ministry of India
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