Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Robust Growth, Manageable CAD and Iran War
Early February 2026 saw presentation of Union Budget, conclusion of much-awaited
US trade deal and pause in monetary cut cycle. Under new base year, the inflation
continued to remain muted and economic growth robust. Liquidity remains ample on
RBI’s support and government spending, while current account deficit (CAD) for
Dec’25 quarter moderated despite peak US tariff pressure. Start of Iran war, however,
is likely to shape the fixed income market outlook in near future.
India
Economic Growth:
According to Mospi’s Advance estimates, Indian Economy is likely to grow at 7.6%y/y
in FY26 (FY25: 7.1%y/y). The growth will be driven by robust private consumption and
capex. From supply side, the growth is likely to be driven by manufacturing,
construction and services. Under new base year, the three-year average GDP growth
(FY24-FY26) is ~7.3%y/y, indicating buoyant domestic growth despite global
headwinds (geopolitical & trade uncertainty).
Inflation:
The first print under the new index (Base year: 2024) indicates that January CPI
inflation stood at 2.75%y/y as against Dec 2025 at 1.15%y/y. The rise in monthly print
was driven primarily by adverse base effect (+ve 120 bps) and pick-up in sequential
momentum. Core inflation eased to 3.4% y/y as against Dec 2025 at 4.6% y/y (old
index). Further, core-core inflation (excluding petrol, diesel, gold, silver) stood at
modest 2.1%y/y (Dec 2025 (old index): 2.5% y/y).
With this, YTD FY26 (April 2025-January 2026) headline CPI is tracking 1.8% y/y (Below
RBI’s lower bound of Inflation target); core inflation is tracking ~4.2% y/y (~ RBI’s
Medium-term target) and core-core (excludes gold) is tracking ~3% y/y (Below RBI’s
medium-term target).
Balance of Payment:
3Q FY26 (Oct-Dec 2025) moderated to 1.3% of GDP (2Q FY26 :1.5%; 3Q FY25: 1.1%) despite
sharp rise in trade deficit. Robust net services exports and NRI remittances helped in
reducing current account deficit (CAD). Apr-Dec 2025 CAD stood modest at 1% of
GDP despite seasonality and sharp rise in US trade tariff. On the other hand, the
capital flows were negative in 3Q due to outflows from foreign investment (FDI + FPIs)
and other capital. As a result, 3Q BoP was near record low (-ve US$24 bn) for second
consecutive quarter. With this, Apr-Dec 2025, BoP was negative by US$31 bn. This has
increased the risk of FY26 likely to have negative BoP balance (second consecutive
year), raising concerns about medium term macro-economic stability.
Foreign Trade:
The merchandise trade deficit in January 2026 rose sharply to US$35 bn (marginally
higher than previous month) primarily due to jump in gold imports and resilient
non-gold non-oil imports. Service trade surplus continued to grow robustly by 19%y/y
(driven by robust services exports & muted imports). During Apr-Jan 2025-26, the
core goods exports & imports (excluding oil & gold) grew at ~6%y/y and 8%y/y
respectively. During similar period, the net services exports grew at ~16%y/y.
Fiscal:
FY26 YTD (Apr-Jan 2025-26) Fiscal deficit stood at 63% of RE FY26 (Dec 2025: US$25
bn; Jan 2025: US$23 bn). This was primarily due to muted revenue expenditure, robust
revenue receipts and non-debt capital receipts. YTD capital expenditure growth
continued to remain buoyant. On sources of funding fiscal deficit, YTD small savings
has already achieved its upwardly revised annual estimates and govt continue to
hold huge cash balances indicating comfort in raising the funds.
System Liquidity:
After remaining modest at ~Rs. 0.7 trn in Dec-Jan, the average banking system
liquidity in February improved to ~Rs.2.5 trn on account of government spending
(seasonality) & RBI’s pro-active measures (OMOs: Rs. 50,000 cr and FX swaps: US$10
bn).
Foreign Flows:
After remaining negative for most part of the fiscal year, the net FPI inflows turned
positive at US$4 bn (driven by both equity and debt) on US trade deal
announcement. Fiscal year YTD (Apr 2025-Feb 2026) FPI flows were small negative at
US$3 bn (Higher US tariffs and US trade deal concerns for major part of year)
vis-à-vis inflow of US$3 bn in FY25.
Currency:
After depreciating by 7.4% in Apr-Jan 2025-26 (on tepid foreign flows and trade deal
uncertainty), the rupee marginally appreciated during the month on US trade deal
announcement. INR stood on an average 90.73 against dollar (Jan 2026: 90.80).
Yield Levels & Spreads:
Fixed income market was range-bound with easing bias during the month marked
by three major events namely Union budget (continuation of fiscal consolidation),
monetary policy (Status quo) and announcement of much-awaited US trade deal.
Feb’26 started with yields hardening on higher-than-expected FY27 gross borrowing
number. However, the announcement of US trade deal, front-loaded OMO and
continuous switches of FY27 maturity G-sec helped in improving the sentiments.
Further, monthly inflation print in line with expectations under new base effect, with
core inflation showing signs of cooling supported yields.
10-year G-sec moved in the range of 6.65%-6.77% during the month (Jan 2026:
6.58%-6.79%;). It closed the month lower at 6.66% (Nov 2025: 6.51%; Dec 2025: 6.58%;
Jan 2026: 6.77%).
SDL yields were range-bound during Feb’26 amidst higher supply. 10-year SDLs
moved in the range of 7.37%-7.51% (Prior month: 7.28%-7.49%). It closed the month low
at 7.37% (Nov 2025: 7.20%; Dec 2025: 7.39%; Jan 2026: 7.47%). The average spread
between 10 yr SDL over G-sec stood lower at 75 bps during the month (Nov 2025: 65
bps; Dec 2025: 72 bps; Jan 2026: 80 bps).
Similarly, 10-year AAA bond yields moved in the range of 7.40%-7.48% (Prior month:
7.28%-7.49%) and closed the month lower at 7.40% (Nov 2025: 7.13%; Dec 2025: 7.28%;
Jan 2026: 7.47%).
Global
Financial Markets:
UST yield eased during the month on lower-than-expected monthly inflation print,
reduced tariff related uncertainty. 10 yr UST close the month lower at 3.97 % (Nov 2025:
4.02%; Dec 2025: 4.18%; Jan 2026: 4.26%).
DXY appreciated in Feb 2026 by ~0.6%m/m (Jan 2026: -ve 1.2%m/m) on rise in
geopolitical concerns.
After depreciating in Q4 (Oct-Dec 2025), the brent crude oil has appreciated by 6.5%
m/m in January 2026 and 6.4% m/m in Feb 2026. The average crude oil stood at
US$70.89 barrel (Avg. lvl in Dec 2025 at US$66.60/barrel). The increased in prices was
due to sharp rise in geopolitical risk and concerns about the supply.
Market View:
- With better clarity on three major events (Union Budget, monetary policy and US trade deal) and economic growth and monthly inflation print in line with expectations under new base index, the G-sec market may now take cues from ongoing Israel-Iran conflict. Crude prices, INR, foreign flows and liquidity may be closely tracked.
- With stable macro and supportive central bank, the rates may likely to remain supportive in the medium to long term. The same is reflected in shorter end of the curve. Active intervention in the secondary market has led to ten-year benchmark (6.48% 2035 GOI Bond) not breaching 6.70% on a sustained basis and some softening is also witnessed at the long end of the curve (as on Mar 05, 2026).
- That said, ongoing Israel-Iran war, if sustained for long (not the base case), may have a passthrough impact on inflation and growth alike.
- Going into FY27, we could expect the RBI to continue to provide support on the liquidity front.
- We could expect yields to remain range bound in near future and spread of long maturity G-secs to narrow in view of conduct of bond purchases by the central bank. 1H (Apr-Sep’26) Indian Government Bond (IGB) borrowing calendar will be an important factor in the spread movement in the next financial year FY27.
Common Source:
RBI, CSO, FAO, CEIC, NSO, US Federal Reserve, US Treasury department, Commerce Ministry of India, Finance
Ministry of India, Budget Document, Mospi, NIMF Internal Research.
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