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Below the Quote on Weekly View on Fixed Income Markets by Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund

The month started with robust PMI numbers though marginally lower from previous month. The composite PMI came in at 59.7 compared to 60 for the previous month. Bonds remained resilient as RBI is conducting Open Market Operations (OMOs) which are leading to a favourable demand supply scenario in the bond markets and also the fact that inflation is coming well below 4% and is expected to align durably with the 4% target in this fiscal year. 

The CPI number for April due on 13th is expected to come in at 3.20%. Government conducted a bond switch with RBI to the tune of INR 373bn on a cash neutral basis in which it sold 2036 maturity securities and bought back securities maturing in 2026.  RBI is also expected to declared a substantially higher dividend of close to INR 3trn relative to earlier expectations of INR 2.50trn, which will help both market liquidity and the fiscal position of the government. 

OMO cut offs have also been at the higher end of market expectations which have  supported the markets. RBI has relaxed investment rules for FPI’s in corporate bonds in respect of maximum 30% holding in short tenure bonds and also in respect of the single issuer exposure limits. This comes as FPI selling in debt continues in May with USD 235mn of outflows since the start of the month. The FPI limits in corporate bonds remain largely unutilised, currently only 14.50% of the INR 7.6 trn limit has been utilised and this flexibility may increase FPI investments in corporate bonds.

As RBI has increased OMO purchases, the net short USD position of RBI in the forwards has reduced to USD 64.2bn as of March end compared to USD 88bn as of Feb end. This shows that RBI has been reducing its short USD positions and neutralising the resultant draining of liquidity by conducting OMOs. RBI has increased its gold reserves by 58 tonnes in FY25 to 879.59 tonnes, constituting 11.70% of its FX reserves. RBI holding of gold has doubled in the last four years. The FX reserves stand at USD 688bn as of 25 April, down USD17bn from the all-time high of USD 705bn it touched in September 2024. The import cover stands at 10.50 months as of March end compared to 11.80 months six months back. 

Money Market yields were stable tough it inched higher as geopolitical concerns escalated with both the 1yr and the 3 month maturity CD yields higher by around 10bps compared to a fortnight back.   The OIS curve remained stable and also steepened relatively with the 1yr OIS moving lower by 2 bps to end the week at 5.64% while the 5yr OIS edged higher by 3 bps to end the week at 5.66%. 

Brent crude edged higher to end the week at 63.91 as DXY strengthened to 100.34 from 99.47 at the start of the month. INR seems to have stabilised even though it weakened during the week. INR has appreciated by 2.50% since touching a low of 87.58 in February.   

International  Markets:

Globally, bond yields edged higher as trade talks gathered pace. The US Fed stood pat on interest rates in an unanimous vote and commenting that there were in no hurry to cut interest rates and that tariffs can lead to both higher inflation and higher unemployment rate. Bank of England reduced rates, as expected and signalled more cuts. China also reduced its 7 day repurchase rate and also cut the CRR, increasing monetary accommodative at a time of economic uncertainty amidst imposition of tariffs by USA.

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