IGI Logo

Below the Quote on  Debt Outlook by Puneet Pal, Head Fixed Income, PGIM INDIA Mutual Fund 

The bond rally took a breather in October as yields inched higher on back of risk aversion ahead of the US Presidential elections and the lingering geopolitical conflict in the Middle East. The Reserve Bank of India’ Monetary Policy Committee (MPC) retained the status quo on policy rates with a 5-1 majority in its October 9th meeting but unanimously changed the monetary policy stance to “Neutral”. The change in the stance led to a mini rally in bonds as the benchmark 10 yr bond yield touched a low of 6.73% before paring gains on profit booking. The MPC retained its forecast for GDP growth at 7.20% and CPI inflation at 4.50% for FY25 with minor tweaks in the quarterly expectations. The undertone of the policy was more balanced compared to the relative hawkishness of the earlier MPC outcomes. The RBI Governor’s statement emphasised that the inflation-growth balance has created congenial conditions for a change in monetary policy stance to “Neutral”, though risks remain and there was a need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses. The Governor’s statement also highlighted the fact that INR continued to be the least volatile among peer EME currencies, and this was so even during the high volatility episode of the unwinding of Yen carry trade in early August 2024. The lower volatility of the INR reflects India’s strong macroeconomic fundamentals and improved external sector outlook. The Governor’s statement further highlighted the success of the Flexible Inflation Targeting (FIT) framework, which has completed 8 years, and stated that over the years, the framework has matured across various interest rate cycles and monetary policy stances and the prevailing well balanced growth-inflation dynamics was a testimony to the success of the FIT framework.

CPI inflation rose to a nine-month high at 5.49% on back of rise in food prices, particularly in vegetables, edible oils and pulses. This was higher than the market expectations of 5.10%. WPI inflation came in marginally lower than expectations at 1.84%. Trade deficit narrowed to USD 20.8 bn in September, from USD 29.7 bn in August, with decline in non-oil imports led by normalisation of gold imports. Services trade surplus remained steady at USD 14.3 bn. Government approved minimum support price (MSP) hikes for the Rabi crops. On an average, the MSP for winter crops rose 4.90% YOY compared to 4.80% in the previous season. Barley had the highest MSP increase of 7%. The increase in MSP is in line with last year’s trends and is unlikely to add to food inflation pressures.

Monsoons were good this year with the highest rainfall since 2020, and recorded the lowest number of sub-divisions (3 out of 36) with deficient rains. Overall, the monsoons were 7-8% higher than the long period average (LPA), thus falling under the above-normal category. This marks the sixth year in a row that India has witnessed normal to above-normal rainfall in the season. Reservoir levels are also higher than the average of the last 10 years which is likely to benefit Rabi crops.

INR came under pressure as a result of heavy FPI selling even as RBI intervened heavily in the FX markets. FX reserves fell by over USD 16 bn from the all-time highs. During October, the FPI outflows were over USD 11 bn from equity and USD 300 mn from debt. The gross FX intervention (Buy+Sell) by RBI, at USD 155 bn between April to August this year, has been much bigger compared to USD 40 bn during the same period last year. RBI continues to bring back its gold holdings back into the country as it brought back another 102 tonnes of gold from the vaults of Bank of England. Out of the 855 tonnes of gold held by RBI at the end of September, 510 tonnes of gold is held domestically, the latest report on management of foreign exchange reserves revealed. Since September 2022, RBI has brought home 214 tonnes of gold amidst heightened geopolitical tensions across the globe. RBI has also been increasing its gold holdings in the recent months, with the precious metal account for 9.3% of RBI’s FX reserves as of end-September compared with 8.1% as of end-March 2024.

The benchmark 10 yr bond yield ended the month at 6.85%, higher by 10 bps compared to September. OIS yields were also higher with the 5 yr OIS ending the month at 6.30%, up by 27 bps in the month. Money market yields were steady as banking sector’s deposits grew faster than credit for the first time since 2022. The 3-month CD yields were steady around 7.18% and the 1 yr CD yields were trading in a range of 7.50%-7.60%.  

FTSE Russel Index included India’s FAR securities in its index beginning September 2025, and now the FAR securities are included in three emerging market indices, which is a long-term positive for the Indian bond markets.

Global bond yields hardened in line with US yields as the benchmark US 10 yr bond yield ended October at 4.28%, up by 50 bps in the month even as the employment data in US disappointed and major global central banks continued with rate cuts. The surge in US bond yields is on the fear that the fiscal deficit in US will continue to remain elevated. Chinese economic challenges remain, as producer prices in China continued their deflationary trend and real estate sector continued to struggle as prices of new homes in China were down 5.08% YOY. The new home prices in China are down for the 15th consecutive month underlining the continuing distress in the housing sector. UK raised taxes by USD 52 bn, the most in 30 years, even as it increased borrowing. UK bond yields surged with the benchmark 10 yr gilt at 4.44%, close to its highest level in almost a year. Yen strengthened as the BOJ Governor indicted that BOJ was still on track for more rate hikes.

Going ahead, we believe that bonds will continue to trade in a range with a downward bias and do not see the benchmark 10 yr bond yield exceeding 7%, even if US yields rise another 20-30 bps from here on. The rate cutting cycle in India is likely to start from February 2025. Markets tend to react before the start of a rate cutting cycle and any retracement in yields from current levels offers a good opportunity to investors, to increase their allocation to fixed income as real and nominal yields remain attractive with favourable demand-supply dynamics playing out in the sovereign bond market. 

Above views are of the author and not of the website kindly read disclaimer