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Indian Bond yields followed the action in the global bond markets as yields fell sharply after the US Fed meeting. The dovish stance of the Fed meeting has effectively ended the rate tightening cycle and can thus be considered as the long awaited PIVOT in the global monetary tightening cycle.

Indian Bond yields, which have been inching higher after MPC meeting last week got a leg down after the Fed meeting. Earlier in the week, headline CPI inflation came in lower than expected at 5.55% and the trend of lower core Inflation continued as the core Inflation printed at 4.10%, a 44 month low though food inflation went up especially in pulses. WPI came in higher than expected at 0.26% led by food Inflation. The trade deficit narrowed to USD 20.60bn for November compared to USD 29.90bn in October. Imports declined whereas exports remained steady. Current account deficit is expected to remain in the vicinity of 1.60%. The benchmark 10yr Bond yield came down by 11 bps to end the week at 7.16% from last week’s closing of 7.27%. RBI announced a 7 day variable rate repo (VRR) of INR 1trn to ease the expected tightness in liquidity due to advance tax outflows. The interbank liquidity remained tight throughout the week with the operating overnight lending rate remaining at 6.75%, the MSF rate. Money market rates continue to be elevated with 3 month CD rates hovering at 7.40%. INR appreciated and ended the week at 83.00 following the slide in the dollar index. Crude rebounded to end the week at 76.55.

The overnight Index swap curve (OIS) curve moved down more than the bond curve. The 5yr OIS was down by 26bps ending the week at 6.20% from 6.46% last week and the 1yr OIS was also down by 23 bps ending the week at 6.62% from last week’s closing of 6.85%. The bond market ,with the move in the last couple of days has started to price in a more benign liquidity environment going ahead and we think that liquidity is likely to move to neutral from deficit from January 2024 onwards but given the strong growth and some concerns on food Inflation , we do not expect any RBI easing to precede global monetary easing. We expect status quo on rates for a longish period though long end yields can start to come down in anticipation of easing aided by FPI  inflows.