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The RBI has taken aggressive and proactive steps to augment domestic liquidity, and given the likelihood of a sub-4% CPI print this week, we expect another rate cut in the MPC meeting in April. Profit booking from banks has put a floor on bond yields so far in spite of aggressive OMO purchases by RBI. We believe that there is a very high probability of yields falling sharply at the beginning of the new financial year in April though till March end profit booking from banks will continue, leading to range bound movement in yields. We expect traditional year end buying from insurance companies and other real money market participants to support the longer end of the curve but see incremental steepening in the yield curve from April onwards.  

Investors can continue to allocate to Short Term/Corporate Bond Funds having portfolio duration up to 4yrs while being tactical in their allocation to Dynamic Bond Funds. Investors should have an Investment horizon of 12-18 months while investing. Money Market yields of up to 1yr are looking attractive from a relative risk-reward scenario and investors can look to allocate in that segment also.                   

Indian Markets:

Indian bond yields were stable during the week. Yields came down across the curve with the longer end of the curve outperforming as the 30yr bond yield came down by 5 bps compared to 3/4 bps downward movement in the rest of the curve. The benchmark 10yr bond yield ended the week 4 basis lower at 6.69%, compared to last week’s closing of 6.73%. The first week of the month saw slight moderation in the PMI numbers with the services PMI coming at 59 and the manufacturing PMI at 56.3. The composite PMI numbers came at 58.8 compared to last month’s number of 60.6.

The central bank continued with its proactive stance on liquidity management by announcing OMO purchases worth INR 1,00,000 crores and USD/INR Buy Sell swap of USD 10 billion. Thus RBI has announced/done a total liquidity infusion of close to INR 4.6 trillion since the beginning of this calendar year. This liquidity infusion is over and above the CRR cut of 50bps in December last year which infused almost INR 1.2 trillion.

We believe that with the latest announcements on liquidity infusion along with the liquidity already infused since January, banking system liquidity should be comfortable crossing over into the next financial year. In fact, we believe that the total banking system liquidity will turn into a durable surplus of close to around INR 4 trillion in May taking into account the possible RBI dividend of close to around INR 2.5 trillion. Retail auto sales dropped 17% in Feb with all segments registering a decline compared to the same month last year. Growth in e-way bills for transporting goods within and across states slowed down to 14.7% in February from 23.1% in January on a YOY basis. India’s oil product consumption fell 5.4% YOY in February, down the most since 2021 to 19.1 million tonnes according to petroleum ministry’s data.

In spite of easing of liquidity conditions, money market yields stayed elevated on the back of  higher supply especially in the 3 month segment where Bank CD yields continued to trade in the vicinity of 7.55% to 7.60%. The 1yr maturity Bank CDs are trading in the range of 7.60% to 7.65%.

In line with the fall in G-sec yields, OIS curve also moved lower with the 1yr OIS down 5 bps on the week and the 5yr OIS down 3bps, ending the week at 5.96%. The OIS curve continues to be inverted though we have seen steepening in the G-sec curve over the last couple of months.

The INR ended the week at 86.88, appreciating by 60 paise during the week as the Dollar Index weakened by 3.50% in the week. FPI inflows into debt continued with almost USD 2bn inflows in the first week of March even as FPI outflows continued from the equity markets.   

International  Markets

Globally, we are seeing tectonic shifts in the geopolitical alignments with major repercussions on markets. Last week we saw “whatever it takes” movement announcements from the Germany’s  new chancellor regarding increased defence and infrastructure spending which means relaxing fiscals  deficit targets which lead to a rout in the German bond markets with the 10yr yield rising almost 40 bps since the beginning of this month.

Same holds true for rest of Europe. US bond yields came down on back of softer economic data and in fact it's likely that we will see a divergence between US and European bond yields going ahead  with the likelihood of lower US yields as the narrative of US growth “Exceptionalism” fades away and the US Fed cuts rates further while fiscal concerns in Europe lead to higher European bond  yields. Chinese CPI slipped into negative territory for the first time in 13 months. CPI declined 0.7% YOY compared to a median forecast of a 0.4% drop. Core CPI also decreased for the first time since 2021, the second such drop in the last 15yrs. The Producer Price Index (PPI) has been in deflation since the last 29 months. This underscores the challenges faced by the Chinese economy.