Debt market

	28/02/2025	31/01/2025	Change (bps)
10 Year Benchmark Yield (s.a)	6.71	6.70	1
10 Year AAA (PSU) (ann)	7.31	7.17	14
5 Year AAA (PSU) (ann)	7.43	7.34	9
3 Year AAA (PSU) (ann)	7.45	7.52	-7
1 Year AAA (PSU) (ann)	7.74	7.71	3
3 Month T Bill	6.47	6.55	-8
3 Month CD	7.44	7.45	-1
6 Month CD	7.60	7.65	-5
9 Month CD	7.60	7.65	-5
12 Month CD	7.63	7.60	3
10 Year AAA Spread	60	47	13
5 Year AAA Spread	79	72	7

Debt markets in February saw lot of changes except for the benchmark ten-year government securities which moved up by one basis points. The spread between 10 year and 40 year Government securities moved up from 32 basis points to 43 basis points. Ten year spread between Government securities and Corporate bonds moved up from 47 to 60 basis points as primary auctions saw poor demand. The effect of this spread increase percolated in the 5-year spread with spread increasing to seventy-nine basis points from seventy-two basis points prevailing in January 2025.

Liquidity in the system remained at a deficit of Rs 1.75 Lakh crores even after liquidity infusion by RBI. This was due to continued selling of dollars by RBI to smoothen Rupee depreciation. Short end of Government securities saw yields moving down by 5 to 8 basis points due to Repo Rate cut by RBI of 25 basis points.

RBI cut the repo rate by twenty-five basis points and maintained its neutral stance. RBI expects CPI inflation for next year at 4.2 percent and GDP Growth at 6.4 to 6.7 levels. RBI monetary policy members have priorities GDP growth over CPI inflation, which is clearly articulated in the minutes of the meeting.

RBI injected Rs 80000 crores through OMO purchases and did long term repo auction of Rs 1.75 lakh crores crossing March 2025 to inject liquidity into the system. RBI conducted Buy / Sell swap in forex markets to inject liquidity into the system. RBI has intervened in the forex market to smoothen forex volatility and market expectation is around 15 to 20 billion USD has been spend in the month of February 2025. RBI liquidity injection has just been sufficient to take care of its forex intervention in the month of February 2025. System level liquidity has not improved even after the infusion of Rs 3 Lakh crores by RBI.

Liquidity tightness has led to spread between Treasury Bills and Money Market instruments remaining elevated. Up to one-year certificates of deposit rates spreads over t bills have remained above 100 basis points. Bank loan growth has slowed down due to restrictions on unsecured loans and higher delinquency in that segment. Banks deposits are not growing as liquidity continues to be tight due to RBI intervention in the forex markets, which is hindering reserve money creation.

Spread continues to increase in corporate bonds and State Government Securities due to the increased supply of these papers. Demand from Insurance, PF, EPFO are not strong enough to take care of the increased supply of bonds in the current year. We have issuance coming daily from AAA PSU along with issuance of Tier 1 / Tier 2 by banks. Due to regulatory changes and less inflow in the debt schemes of Mutual funds, MF participation is lower compared with last few years in these auctions.

GDP growth for the third quarter came at 6.2 percent, which was as per expectations. The government is targeting a GDP Growth of 6.5 percent for this year at 6.7 percent for next year. The government is targeting a growth of 7.6 percent due to Kumbh mela and government spending in the last quarter of 2024-25 to achieve the current year target of 6.5 percent.

Growth number for next year looks difficult without policy support due to tariff wars going on after Trump elections. Fiscal policy is in contraction mode in India, Fiscal deficit for next year is targeted at 4.4 percent of GDP versus 4.7 percent in this year. The government has stated it wants to bring the Debt to GDP ratio from 57 percent prevailing currently to 50 percent by 2030-31. Monetary policy is expected to take the baton as CPI inflation is expected to be in the range of 4 percent. As monetary policy operates with a lag, we expect RBI to frontload rate cuts and ease liquidity conditions at the beginning of next year to support growth in the economy.

RBI has stated it wants real rates, which is the difference between repo rates and one year CPI inflation to be around 1.5 per cent. At present, it is 200 basis points as repo rate is 6.25 and one year ahead CPI inflation is at 4.2 per cent. The front end of the yield curve which is flat due to tight liquidity is expected to steepen as liquidity comes back in the system and RBI cut rates by another fifty basis points in this easing cycle. Investors investing in duration products should benefit due to rate cuts and spread compression in corporate bonds.