Debt market

	31/05/2024	30/04/2024	Change (bps)
10 Year Benchmark Yield (s.a)	7.02	7.19	-17
10 Year AAA (PSU) (ann)	7.56	7.59	-03
5 Year AAA (PSU) (ann)	7.64	7.69	-05
3 Year AAA (PSU) (ann)	7.74	7.77	-03
1 Year AAA (PSU) (ann)	7.72	7.80	-08
3 Month T Bill	6.89	6.99	-10
3 Month CD	7.13	7.30	-17
6 Month CD	7.45	7.42	03
9 Month CD	7.57	7.52	05
12 Month CD	7.71	7.65	06
10 Year AAA Spread	54	40	14
5 Year AAA Spread	51	49	02

During Last month, Debt Market traded with a positive bias due to RBI dividend of Rs 2.11 Lakh Crores, expectation of NDA forming the government, India’s Sovereign Upgrade story, fall in US bond yields and FII buying in Debt due to India’s Inclusion in JP Morgan Emerging Market Bond Fund from June 2024.

Liquidity injection in the system by RBI to bring the overnight rates closer towards repo rates of 6.50 percent rates Maintained downward bias in the short end of the yield curve. The Corporate bond yield curve is inverted from 3 years onwards and State Government securities are inverted in the ten year and above segment due to EPFO, Pension and Insurance company buying.

The Bond markets rallied last month due to RBI dividend payment of Rs 2.11 Crores. This amount is Rs 1.30 Lakh crores excess than what is budgeted in the interim Budget. This excess amount received by the Government is 0.37 percent of GDP. Positive news flows in terms of standard and poor upgrading India’s outlook to positive boosted sentiments.

The Long end of the Government securities saw strong buying interest from long term investors as the sovereign bond yields of forty-year maturity moved above 7.20 percent levels. These levels put a floor beyond which long end yields did not move up.

The spread between 10 year and 50 year is trading at 15 basis points against average of 30 basis points and spread between repo rates and 10 year is at 50-55 basis points compared with average of 60 to 80 basis points in easing cycle. The absolute levels of yields seem to be drawing investor interest rather than spread prevailing in different segments of the yield curve. The one-year rates and ten year are trading flat within the range of 7 to 7.05 levels and the 2-to-8-year segment is inverted.

Liquidity in the banking system increased due to frequent VRRR auctions conducted by RBI to bring overnight rates near operating Repo Rate. The overall system liquidity is positive by Rs 4 Lakh Crores due to lower government spending and higher currency in circulation due to elections. Normally, in the month of April to June, liquidity increases in the banking system due to Government spending.

Rates fell in the short end, with 3-month T bills trading at 6.89 versus 6.99 percent in April. 3 months certificate of deposit rates are trading at 7.13 levels from 7.30 levels prevailing in the month of April. NBFC spreads over CD are in the range of 60 to 150 basis points depending on the rating.

US yields have rallied as unemployment rate moved towards 3.9 levels and April non-farm payroll indicated moderation in economic activity. US market started pricing two rate cuts this calendar year against expectation of hike in policy rates to control CPI inflation. US ten-year yields fell from 4.70 levels to 4.40 levels as rate cuts expectations again get priced in the market.

RBI Policy Stance
RBI Monetary Policy Committee (MPC) voted with a 4-2 majority to keep key rates unchanged (Repo Rate at 6.50%, SDF rate at 6.25% and MSF rate at 6.75%). MPC decided with a 4-2 majority to maintain stance as withdrawal of accommodation. RBI has indicated nimble systemic liquidity management on an on-going basis, with an objective of keeping overnight operating rate (WACR) aligned with stance of policy.

As per RBI assessment, Inflation is showing slow progress towards target of 4 percent with services inflation remaining elevated. The global economic activity is rebalancing and is likely to maintain its steady growth in 2024.Above average expected monsoons, sustained momentum in manufacturing and services, high-capacity utilization, continued government thrust on infrastructure, improving global trade prospects augur well for domestic growth.

Headwinds from geopolitical tensions, volatility in international commodity prices, and geoeconomic fragmentation, risks to the outlook. Based on this assessment, Real GDP growth for 2024-25 is projected at 7.2 per cent with Q1 at 7.3 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent.

Adverse climate events impart considerable uncertainty to the food inflation trajectory. Normal monsoon, however, could lead to softening of food inflation pressures over the course of the year. Pressure from input costs have started to edge up, volatility in crude oil prices and financial markets along with firming up of non-energy commodity prices pose upside risks to inflation. CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent.

Fixed Income Outlook post Monetary Policy
Monetary policy is largely on expected lines, with no change in stance or policy rates. Governor mentioned continued focus to get inflation within target zone on sustainable basis, thereby indicating no near term likely hood of policy easing.

The growth forecast has been raised by 20 bps and inflation (CPI) forecast has been left unchanged. RBI has chosen path of stability, and hence policy is expected to be directed on same lines. We do not expect much impact in markets and expect yields to remain range bound. We expect 10-year g-sec yield to trade in the band of 6.95%-7.10% in the near term, any change in broad range can happen once RBI indicated eagerness to ease policy.