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Below the Quote on Monthly Debt Market Outlook by Puneet Pal of PGIM India Mutual Fund

Bond yields stabilised in February on the back of RBI’s liquidity infusing measures. RBI stopped absorbing  the surplus banking sector liquidity via Variable Rate Reverse Repo (VRRR), resulting in overnight lending rates going below the SDF rate and sustaining there. The sustained lower overnight rates supported the money market curve as short term yields came off. The bond curve also got support from lower overnight rates as well as the INR 75,000 cr switch which government did with RBI, lowering the gross supply for FY27. Further, a sentimental boost came via the announcement of the INDIA-USA trade deal which led to nearly 2% appreciation in INR followed with a  rebound in FPI inflows into equity markets. The benchmark 10yr bond yield fell by 4 bps during the month and the curve steepened a bit with the shorter end of the curve up to 5yrs maturity outperforming.

At the start of the month, the MPC meeting was on expected lines with status quo on policy rates and the monetary policy stance. RBI gave an assurance to provide adequate liquidity and we believe RBI will focus more on the transmission of monetary policy, which got adversely impacted over the last couple of months, while maintaining the status quo on policy rates. The monetary policy minutes indicated that the committee remained sanguine about growth prospects while viewing the current policy rates as appropriate, though Prof. Singh was of the view that with subdued core inflation, there can be further rate cuts even as the timing remains data dependent. The RBI Governor emphasised on the composition of CPI inflation.

Overall, the minutes had a dovish tinge while maintaining a data dependent approach. The first print of the new series of CPI inflation with base year of 2024 was released and it came in line with expectations at 2.75%. Food inflation came in at 2.10% and core inflation at 3.40%. The items and their corresponding weights in the new CPI basket are based on the Household Consumption Expenditure Survey (HCES) 2023-24. The weightage of food has dropped in the new series to about 37%.

A few more prints will be required to analyse the granular details but core inflation is seen to be quite a bit softer in the new series compared to the old series. The new GDP series also came out with the National Statistical Office (NSO) projecting real FY26 GDP growth at 7.60% under the new series with base year of 2023. Nominal GDP is projected to grow at 8.6%. There is reduction in the nominal GDP size, which may present some challenges on the fiscal front going ahead. The trade deficit came in at USD 34.70 bn, higher than last month’s USD 25bn with gold imports shooting up to USD 12bn from an average of USD 4bn in Nov-Dec 2025. Thus India’s macro-economic variables remain stable and the trade agreements announced with the EU and US are likely to be supportive of growth going ahead.

Money market yields came down as overnight lending rates dropped below the SDF rate, with RBI refraining from absorbing the surplus banking liquidity, indicating its discomfort with elevated yields. We expect RBI to continue with this stance of letting the overnight rates trade below the SDF rate. We expect bond yields to  continue to trade  in a range though demand from real money investors is likely to help the long duration bonds which are at attractive valuations.

We expect the benchmark 10yr bond yield to continue to trade in a range of 6.55% to 6.75% and the yield curve to remain steep.
 

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