Fixed Income
Market Update
and Outlook
Market Update
and Outlook
Market Update
Global Financial market repricing & Extended long pause in
policy rates
April 2024 witnessed sharp repricing of assets across the
global financial markets. Recent rhetoric of global central
bankers, stronger than expected growth data and grudging
acceptance by market participants of slower and delayed start
in the rate cut cycle resulted in
volatility in global fixed income and currency markets during April’24. Further, the sharp rise in geo-political
tensions and growing uncertainty added uncertainty risk
premium to the already volatile markets.
India
Monetary Policy:
In Apr’24 policy, RBI maintained the status quo on policy rate
and stance. While RBI expect economic growth to be robust and
inflation to edge down in FY25, it highlighted the upside risk
to inflation from food inflation, climate shock, rising
geo-political risks and crude prices.
Inflation:
In Mar’24, CPI inflation eased to 4.85%y/y (Feb 2024: 5.09%
y/y, Last year same period: 5.66%y/y), driven down primarily
by favourable base effect and broad-based muted sequential
momentum. Excluding vegetables, headline inflation eased
further to 3.53%y/y (Previous month: 3.73%y/y; Mar 2023:
6.58%y/y). Core inflation continued to edge down to record low
3.25%y/y (Feb 2024: 3.37%y/y; Last year same period:
5.78%y/y). Average headline CPI inflation in FY24 eased to
5.4%y/y from 6.7%y/y in FY23 and was in line with RBI’s
projections. Core inflation eased sharply to 4.3%y/y in FY24
(FY23: 6.1%y/y).
External Sector:
Mar’24 Trade deficit moderated to US$15.6 bn (Feb 2024:
US$18.7 bn; Mar 2023: US$18.7 bn; & lower than monthly average
FY24: ~US$20bn) - aided by seasonality in exports and decline
in sequential pick up in imports. After the robust growth in
FY22 & FY23, export as well as imports declined in FY24 on
easing commodity prices (including crude oil) and contraction
of global trade in CY2023. Although net services exports
declined in March, overall net services grew robustly at
14%y/y despite the adverse base effect (FY23: 33%y/y).
After the robust inflows in Feb-Mar 2024, FPI flows contracted
by ~US$2 bn in Apr’24 on global cues. Sharp rise in UST,
strong dollar led to outflows from emerging markets (including
India). That said, CY2024 saw overall robust inflows in first
four months to the tune of US$7.4 bn, driven primarily by debt
inflows (US$5.4 bn).
On back of strong dollar, average Rupee continued to
depreciate, albeit marginally against US dollar in April 2024
and stood at 83.41during the month (Mar 2024: 83).
Liquidity:
Core liquidity (system liquidity + Government balances)
declined from 2.4 trn at Mar’24 end to ~1.5 trn by Apr’24 end,
driven by cash leakage due to seasonally high cash demand,
RBI’s actions (intervention and forex swap maturities), and
higher CRR provisioning requirement. System liquidity was
marginally positive at average Rs. 10,500 cr in April (Jan
2024: avg -ve Rs. 2.1 trn; Feb 2024: avg -ve 1.9 trn; Mar
2024: avg -ve Rs. 0.43 trn) on back of seasonally robust
government spending.
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 Apr 2024, 10-year G-sec yield moved in the range of
7.10-7.23% during the month. 10 yr G-sec closed the month
lower at 7.20% (March 2024: 7.05%; February 2024: 7.08%;
January 2024:7.14%). Average 10-year term premia improved to
~13 bps during the month (Mar 2024: flattish).
Taking cues from G-sec, 10-year SDL yields moved up (range of
7.40-7.51%) to close the month higher at 7.47% (March 2024:
7.38%). April SDL primary issuances was high at Rs.51,200 cr
(Apr 2023: Rs. 22,300 cr). The average spread between 10 yr
SDL over G-sec eased to 29 bps during the month (March 2024:
34 bps).
Like SDLs, AAA bonds moved up a bit during the month with 10
yr AAA PSU moving in the band of 7.44%-7.559% (Previous month:
7.44%-7.55%). It closed the month lower at 7.56% (Mar 2024:
7.44%).
Global
Monetary Policy:
Better than expected 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 European Central Banks (ECB) has indicated
that they might start policy easing from Jun’24 onwards.
Inflation:
US inflation rose to 3.5%y/y in March 2024 (Feb 2024: 3.2%y/y;
Jan 2024: 3.1%y/y). Sequential growth in headline was higher
at 40 bps driven by food, fuel and core services. Global food
prices continued to remain in disinflation for sixteen
consecutive months, (with IMF’s FAO food index down to
negative 7.3%y/y in Mar 2024 vis-à-vis -ve 20%y/y one year
prior). Oil prices have increased sharply since the start of
calendar year 2024, with April brent prices hovering on
average ~ US$89.9/barrel (Jan 2024: US$80/barrel, Feb 2024:
US$83.5/barrel; Mar 2024: US$85.41/barrel), on supply concerns
(Red Sea issue, middle east war, geo-political risk
escalation, OPEC plus extending the supply cuts).
Financial Markets:
During Apr’24, US treasury yields rose sharply during the
month driven by strong non-farm data, sticky monthly inflation
print, oil movement, US Fed policy makers comments and rising
geo-political concerns. US 10 Yr Treasury bond (UST) yield
moved in the range of 4.31-4.70% and closed the month lower
4.69% (March 2024: 4.20%). Dollar Index appreciated by 1.54%
in Apr (March 2024: +ve 0.54%; CY2024 YTD: +ve 4.8%) 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 will 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.
- In Apr 2024, the Developing Markets (DMs) space led by the US has seen very high volatility across the rates and currency markets, which may continue in the near term. However, the INR has relatively performed better across Emerging Markets, which may lead to sustainability and better rationale.
- Notwithstanding recent volatility and some uptick in yields, there is enough reason to stay constructive in Indian rates and use these corrections to add allocation and incremental duration in portfolios
Common Source:
RBI, ECB, CSO, FAO, CEIC, NSO, JP Morgan, US Federal
Reserve, US Treasury department, Commerce Ministry of
India, NIMF Internal Research.
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