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Synopsis

Global Developments

* Trade tensions de-escalate; markets turn focus to US fiscal risks.

* US 10Y yield has surged by around 40bps in May amidst fiscal worries. 

* Dollar index remains weak near 100, well below its January peak of around 110.

* Asian currencies have strengthened CYTD.

* Weak auction demand pushed JGB yields higher.

* China’s US treasury holdings fall below the UK’s.

India Debt & FX Market Trends

* Liquidity surplus rose further. Average banking system liquidity surplus stood at Rs 1.7 lakh crore in May.

* Liquidity should stay comfortable, with an expected RBI dividend of Rs 2.5-3 lakh crore.

* Headline CPI inflation eased to 3.2% in April, the lowest since August 2019. 

* We expect the RBI to cut the policy rate by another 50bps in FY26, with chances of a deeper rate cut cycle if growth falters.

* India 10Y GSec yield eased by around 35bps since March. 

* Corporate bond issuances in April 2025 amounted to around Rs 1 lakh crore, up 76% YoY.

* Goods trade deficit widened to a 5-month high in April, while services surplus remained strong.

* Net FPI inflows of USD 1.1 billion were recorded in May (up to 22 May), reversing outflows in April. 

* Rupee has strengthened by around 2% against the dollar from its February lows.

* REER suggests rupee valuation concerns have eased considerably.

• The US and China agreed to a 90-day tariff truce, with deeper-than-expected tariff cuts.

• The US and UK announced a trade deal. The deal includes a 10% reciprocal tariff (as originally announced on 02 April), reduced tariffs on the first 100,000 vehicles imported into the US by UK car manufacturers each year, and the removal of US tariffs on UK steel and aluminum. The deal is also expected to expand US market access in the UK, creating a USD 5 billion opportunity for new exports for US farmers, ranchers, and producers.

• Trade negotiations between the US and other countries are underway. While US tariffs are expected to stay above pre-Trump 2.0 levels, they are likely to be lower than feared – easing global growth concerns

• US fiscal concerns are in focus as a tax bill under consideration could increase the US deficit by USD 3.8 trillion over the next decade, according to the Congressional Budget Office.

• The US 10Y yield has surged by around 40bps in May to 4.6% (as of 21 May) amidst fiscal worries.

• Markets are now pricing in two Fed rate cuts in 2025 – down from four – due to easing recession risks.

• The dollar index remains weak near 100, well below its January peak of around 110.

• Asian currencies have generally strengthened CYTD supported by a weaker dollar and the 90-day US-China tariff truce – with the exception of IDR.

• Notably, the Taiwan dollar has appreciated 8% CYTD, with most gains in early May. This was driven by a confluence of factors including:

a) Speculation that Taiwan may allow a stronger TWD to support trade negotiations with the US.

b) A weaker dollar environment, prompting exporters to convert their dollar earnings, while life insurers increased hedging demand.

c) Strong foreign capital inflows, following Taiwan’s better-than-expected Q1 GDP growth.

• Japanese government bond (JGB) yields have risen CYTD amidst elevated inflation and as BoJ unwinds ultra-loose monetary policy. Weak demand at a recent auction has also put pressure on long term yields.

• In March, total foreign holdings of US Treasuries rose by USD 233 billion to around USD 9 trillion. While China’s holdings fell by USD 19 billion to USD 765 billion, the UK’s holdings rose by USD 29 billion to USD 779 billion, making it the second-largest foreign holder after Japan.

• The decline reflects China’s ongoing diversification away from US assets since 2013.

• However, China is also believed to hold US Treasuries through third-party custodians, which may understate its official holdings. Additionally, the data is only available till March and does not capture any potential sell-off following Trump’s Liberation Day announcement, which led to a sharp rise in US yields.

• China’s exports rose 8.1% YoY in April, well above the 1.9% market estimate, though exports to the US fell by 21%. The 90-day US-China tariff truce may support near-term exports through front-loading of orders.

• Real estate investment fell 10.6% YoY in January-April period, highlighting continued weakness in the sector which is keeping domestic consumption subdued.

• In May, the PBoC cut key lending rates to record lows and reduced the reserve requirement ratio by 50bps. Further, monetary policy easing is expected to support growth.

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