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Bond yields stayed elevated during the month despite the longer segment of the sovereign bond curve outperforming on the back of value buying. The 10yr segment underperformed as yields were higher by 5bps during the month compared to yields across other parts of the curve that remained flat.

Consumer Price Index (CPI) Inflation came in at 2.10% below market expectations of 2.25%, largely driven by moderation in food prices. Food prices contracted by 1.1% YoY, led by a sharp decline in prices of vegetables, pulses, cereals, sugar and spices. Core inflation (CPI excluding food, beverages and fuel) inched up to 4.4%. The latest CPI print reinforces the benign trajectory driven by moderating food prices as well as benign commodity prices. CPI inflation for FY26 is likely to average below RBI’s forecast of 3.70%, coming in around 3%. This increases the probability of incremental rate cuts, and we expect one more policy rate cut of 25bps by Oct 2025.

Wholesale Price Index (WPI) inflation slowed further to -0.13%, the lowest print since Oct 2023. This was driven largely by food prices (both in vegetables and cereals, pulses). The goods trade deficit narrowed (for June) to USD18.80bn (May: US$21.9 bn), led by a sharp fall in oil and gold imports. The services trade surplus remained steady at US$15.3 bn. Exports in June decreased 0.1% YoY to US$35.1 bn (May: US$38.7 bn. The trend of increasing exports to the US continued with an increase of 24% in June and 22% in 1QFY26, even as overall export growth was flat, signaling front-loading of exports to the US over other destination countries.

Imports in June decreased 3.7% YoY to US$53.9 bn. Both oil and non-oil imports fell sharply. Gold imports have declined 26% YoY in June and 10% YoY in 1QFY26. The external account is expected to remain stable with analysts expecting the current account deficit around 1% of GDP. The US President announced a 25% tariff against Indian imports from 1 August, with an unspecified 'additional penalty'. Although trade negotiations are still underway between India and the US, the expectations on the final trade deal have been pushed forward by 2-3 months. Exports to the US account for 2.2% of India’s Gross domestic Product (GDP), and these tariffs can adversely impact India’s GDP by 20bps-30bps depending upon the rate of the final tariffs imposed on India exports.

The Central government’s fiscal deficit was 18% in Q1FY26, led by lower tax collection and stronger Capex. The Central government’s total receipts grew 12.9% YoY in 1QFY26 (27% of FY2026BE), led by non-tax revenues, especially the RBI’s dividend, while tax revenue growth remained weak. Gross tax revenue growth was weak at 4.6%, while net tax revenue declined 1.7% in 1QFY26, post devolution to states. Direct tax growth declined by 0.9% YoY (18% of FY2026BE).

Data till July 10 shows contraction of 4.9% growth in corporate tax while personal income tax growth has remained flat. CGST collection growth was just 1.5% YoY in 1QFY26. The Central government’s total expenditure grew 26% in 1QFY26 with large increase in capital expenditure (52% YoY) led by defense and railways. Revenue expenditure growth in 1QFY26 was at 20% (24% of FY2026BE) more than half of which was for interest payments. We expect the government to stay on the fiscal consolidation path with higher RBI dividend transfer cushioning the impact of potential lower tax revenue and continue to expect the central government to stick to the fiscal deficit of 4.40% for FY26. India received above-normal rainfall (105% of long period average or LPA) in July 2025, mildly lower than the India Meteorological Department’s (IMD) forecast (>106% of LPA) for the month.

INR has been underperforming led by portfolio outflows and importer demand. INR ended the month at a low of 87.60, depreciating more than 2% in the month. FPI outflows from equity neutralised the inflows into debt.  

Money market yields were stable and trended lower towards the end of the month with 1yr maturity Certificate of Deposits (CDs) trading at 6.25% and 3-month CDs trading at 5.75%-5.78%% at the end of the month. The Overnight Index Swap (OIS) curve steepened a bit with the 1yr OIS yield lower by 3 bps during the month and the 5yr OIS yield higher by 1bps during the month.

Globally, bond yields stayed elevated on continued strength of the US economy with the benchmark US 10yr Bond yield ending the month at 4.37% though the employment data in the US came in much weaker than expected which led the bond yield lower on 1st of August. Overall, the US bond markets are pricing in 100bps of rate cuts in the next 1 year. Given the debt challenge and the elevated fiscal deficit in advanced economies, we expect the yield curve to remain steep.  

In India, bond yields have gone up since the last Monetary Policy Committee (MPC) meeting as markets are uncertain about the messaging from the RBI and the MPC. Markets are expecting a status quo policy on 6th August but will be looking forward to better communication in the policy and towards the contours of the new liquidity framework, which is expected to be announced in the Policy. Going ahead, we expect the yield curve to remain steep and expect the shorter end of the corporate Bond curve (3yr-6yr) to outperform over the medium term.