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Contents

* Key Global Developments

* IMF raises global growth forecast

* JGB yields rise

* ECB pauses rate cuts

* Fed likely to hold rates in July

India Debt & FX Market Trends

* Inflation continues on a downward trajectory

* Cumulative rainfall 7% above the LPA

* Liquidity conditions comfortable

* VRRR auctions push the call rate temporarily above the repo rate

* 10Y GSec yield inches up; Yield curve steepens

* Bank credit & deposit growth eases vs last year

* Key banking sector rates yet to fully reflect repo rate cuts

* Slight dip in CD issuances; Sharp rise in CP issuances

* Corporate bond issuances surge

* Goods deficit widens in Q1; Services surplus rises

* FPI outflows continue for second straight month in July

* Rupee weakens over the past month, volatility stays low

IMF Raises Global Growth Forecast

* The IMF has raised its global growth forecast for 2025 and 2026, driven by stronger-than-expected front-loading in anticipation of higher tariffs and lower effective US tariff rates (the US effective tariff rate underlying the IMF’s July projections is 17.3%, down from 24.4% in April). A weaker dollar is also cushioning the tariff impact on US trading partners.

* However, growth projections for 2025 and 2026 remain below the 2024 outcome of 3.3% and the pre-pandemic average of 3.7%.

* Inflation is expected to stay above target in the US but remain more subdued in other major economies.

* Risks to the outlook remain tilted to the downside.

JGB Yields Rise

* 10Y, 20Y and 30Y JGB yields rose by 21, 24 and 16 bps, respectively, over the past month.

* Long-end yields up on fiscal concerns and reduced demand from Japanese life insurance companies.

* Elevated inflation (3.3% in June vs 2% target) supports further monetary policy normalisation.

* BoJ likely to hold rates in July. However, the odds of an October hike have risen.

ECB Pauses Rate Cuts

* EU inflation hit the ECB’s 2% target in June.

* ECB kept policy rates on hold in July’s meeting, marking its first pause since July 2024.

* ECB is likely to stay on hold this year, though downside growth risks from tariffs and a stronger euro could prompt a final rate cut later this year.

Fed Likely to Hold Rates in July

* Tariff impact on US consumer prices is starting to show. US inflation rose to 2.7% in June (vs 2.4% in May), the highest since February.

* The labor market has loosened but the unemployment rate remains well below the historical average.

* We expect the Fed to stay on hold in its July meeting. Markets are pricing in two Fed rate cuts this year (in September and December).

Inflation Continues on a Downward Trajectory

* Sustained easing in CPI inflation was primarily driven by moderation in food inflation and a favourable base effect.

* The rise in core CPI is not broad-based and is mainly attributed to double-digit inflation in precious metals.

* We expect average CPI inflation to marginally ease from 2.7% in Q1 FY26 to 2.6% in Q2 FY26, before rising to above 4% in Q4 FY26.

Cumulative Rainfall 7% Above the LPA

* Southwest monsoon has been 7% above the Long Period Average (LPA) as of 28 July 2025.

* With rainfall projected to be above normal in July, the prospects for agricultural output remain favourable.

* Total sown area has increased by 4% YoY as of 25 July 2025. Despite some slowdown in sowing, the overall sowing progress remains upbeat.

Liquidity Conditions Comfortable

* Average banking system liquidity surplus rose to Rs 3.2 lakh crore in July (up to 24 July) from Rs 2.7 lakh crore in June.

* Core liquidity surplus surged to Rs 5.8 lakh crore as of 27 June.

* The RBI conducted VRRR auctions of varying maturities to manage the evolving liquidity conditions.

* The banking system liquidity surplus currently stands around 1.1% of NDTL. We expect the RBI to maintain the surplus in the range of 1-1.5%

VRRR Auctions Push Call Rate Temporarily Above the Repo Rate

* On average, the WACR was 18 bps below the policy rate in July (up to 24 July), compared to 21 bps in June.

* On 22 and 23 July, the WACR exceeded the repo rate before aligning with it thereafter.

10Y GSec Yield Inches Up; Yield Curve Steepens

* India 10Y GSec yield rose by around 7 bps over the past month.

* Higher UST yields added some upward pressure.

* Domestic yields also rose as RBI Governor signaled future rate moves will hinge on the 6–12 month inflation outlook, not current dynamics. He also stressed that the shift to a ‘neutral’ stance raises the bar for any rate cut.

* The yield curve has steepened, with short-end yields falling and long-end yields rising.

* RBI front-loaded easing with a 50 bps repo rate cut in June and shifted its stance to neutral. We do not expect further rate cuts unless downside risks to growth materialise.

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