Debt market

	29/11/2024	31/10/2024	Change (bps)
10 Year Benchmark Yield (s.a)	6.74	6.84	-10
10 Year AAA (PSU) (ann)	7.28	7.34	-6
5 Year AAA (PSU) (ann)	7.37	7.52	-15
3 Year AAA (PSU) (ann)	7.48	7.56	-08
1 Year AAA (PSU) (ann)	7.63	7.63	0
3 Month T Bill	6.47	6.51	-04
3 Month CD	7.18	7.18	0
6 Month CD	7.40	7.40	0
9 Month CD	7.40	7.40	0
12 Month CD	7.55	7.55	0
10 Year AAA Spread	54	50	5
5 Year AAA Spread	69	74	-5

Government Securities rallied on the last day due to India’s second quarter GDP growth coming at 5.4 percent against market expectation of 6.5 percent. RBI projection for the second quarter GDP growth was 7 percent. The market was volatile due to October CPI inflation coming at 6.21 percent. US yields moving higher due to incumbent US president Donald trump tax cut proposal which could led to higher fiscal deficit and imposition of tariffs which will led to higher inflation in US. The Federal terminal rate cut which was in the 3.25 to 3.50 band has moved to 3.75 to 4 percent band.

The US Dollar strengthened due to the expected tariff increase by the US and expectation of lower fiscal deficits with the appointment of Scott Bressent as new treasury secretary. Scott Bressent has stated he will bring the fiscal deficit to 3 percent from 6 percent prevailing at present by 2026. This is positive for the dollar. The Chinese currency yuan depreciated against the dollar due to expectation of 60 percent increase in tariffs on Chinese goods coming into US. Trump has also indicated he will go for twenty-five tariffs against goods imported from Mexico and Canada. The Chinese yuan has depreciated by 2.7 percent against the dollar and Indian currency depreciation of 0.7 percent. the emerging market dollar index has fallen by 2.5 percent after trump victory.

Liquidity in the banking system has fallen from Rs 4 Lakh crores surplus to Rs 1 lakh crores at present. This is due to currency leakage and RBI selling dollars in the spot and forward market to smoothen the currency depreciation. Liquidity is expected to remain tight in the second half of the fiscal year, even after a CRR cut of Rs 1.16 Lakh crores. This is due to RBI forward sales of USD 20 Billion and expected currency leakage as economic activity picks up in the festival season.

Debt markets were volatile during the month with the ten-year touching 6.86 levels due to higher October CPI inflation of 6.21 percent. Higher food inflation accounted for 74 percent of the rise, even though the weightage for food is 46 percent in the CPI inflation index. CPI Inflation for the month of November is expected at 5.50 to 5.70 percent. December month CPI inflation is expected to be around 5 percent as rabi crop harvest starts coming into the market. Currency weakness led to FII selling in debt market in the month of November from the Fully accessible route (FAR) to the extent of Rs 4300 Crores. Market players created short positions as they pushed back rate cuts to April meeting and expected hawkish comments from RBI in the monetary policy on 6th December 2024.

The second quarter GDP number came at 5.4 percent against market expectation of 6.5 percent. Weakness was reflected in mining and manufacturing sectors and urban consumption demand has weakened in line with management commentary of companies. Private investment is showing a slump with only Government spending and rural demand boosting demand. The first quarter GDP now stands at 6.05 percent. RBI has revised its third and fourth quarter GDP to 6.8 and 7.2 percent and the full year GDP growth to 6.6 percent. CPI inflation for the full year has been revised to 4.8 percent, with the fourth quarter inflation at 4.7 percent. The GDP growth for the second quarter is 8 percent and the first half nominal GDP growth is 8.9 percent. The government while presenting the current year budget has factored nominal GDP growth of 10.5 percent.

RBI in its monetary policy stance has kept rates unchanged but cut the CRR by fifty basis points. The RBI governor has stated the effect of rate cuts should have maximum impact and not be wasted. With liquidity being tight, the priority was to loosen liquidity and subsequently as CPI inflation comes towards target rate, RBI could start prioritizing growth over CPI inflation. We are now in an adverse mix situation with growth slowing down and inflation moving up, this could change in the last quarter. We should expect rate cuts to start from February onwards as CPI inflation moves towards the 4 percent level. Investors should invest in duration products to take advantage of rate cuts and high accruals prevailing at present.