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Indian Markets:

Indian Bond markets stabilised after seeing bouts of volatility earlier in the month as RBI announced a slew of steps to alleviate liquidity  in the banking system. Bond yields were coming down in anticipation of such a move. The benchmark 10yr bond touched an  intra-month-low of 6.64% after the announcement before profit booking took place and yields ended the week and the month at 6.70%,  down 6 bps during the month and 2 bps over the week. The central bank announced measures to the tune of Rs. 1.50 lakh cr to alleviate  the liquidity deficit in the system, Rs. 60,000 cr worth of OMO purchase, Rs. 50,000 cr of 56 day VRR and a USD/INR buy/sell swap  of USD 5bn.  

The liquidity augmenting measures become necessary as RBI had intervened aggressively to prevent INR depreciation over the last 3-4  months. The short USD position of RBI has swelled to USD 68 bn as of Dec 2024 end from USD 59 bn in Nov end 2024 in the forwards  market, apart from intervening in the spot market to the tune of USD 40 bn. RBI has also bought almost Rs 3,000cr worth of G-secs in  the secondary market. The big event of the week was the Union Budget, which reiterated the government resolve towards fiscal consolidation as it pegged the  fiscal deficit at 4.40% for FY2026, lower than market expectations. The government remains committed to bringing down the central  government debt to GDP to 50% by 2031 from 57% currently. From the bond market perspective, the net borrowings at Rs 11.5 trn is  in line with market expectations though the gross borrowing numbers were higher than market expectations at 14.8 trn. We expect the  bond yields to remain largely stable in the run up to the MPC meeting on 7th Feb as OMO purchase and expectations of a rate cut will  keep the market supported. INR ended the week and the month at 86.62, depreciating by 1% during the month and 0.5% in the week.

Foreign Portfolio Investors (FPI) flows into FAR securities was positive during the month at USD 945mn while the equity flows were  negative to the tune of USD 9bn. The OIS curve reacted positively to the liquidity measures announced by RBI and the curve moved lower with the 1yr OIS moving lower  by 4 bps to end the week at 6.33% while the 5yr OIS ended the week 5 bps lower at 6.08%. The OIS curve steepened during the month  as the 1yr OIS is down 18 bps in the month while the 5yr OIS is lower by 12 bps. The steepening trend was seen in the G-sec curve  also with benchmark 10yr bond moving lower by 6 bps during the month while the 30yr bond yield was higher by 1 bps during the  month.  

Money market yields were also lower as the 3 month CD yields were lower by 10bp during the week reacting positively to the liquidity  enhancing measure taken by RBI. 1yr CD yields were also lower by 8-10 bps during the week.

International Markets: 

US bond yields remained rangebound and were lower on the back of relatively softer economic data with the Personal Consumption  Expenditure (PCE) data coming in line with expectations. Advance GDP estimates for Q4 (QoQ) were marginally lower than expected at  2.30%. The Federal Open Market Committee (FOMC) meeting was on expected lines as the Fed held on to rates while signalling that they were not in a hurry to cut rates. US imposed tariffs on its three largest trading partners, Canada, Mexico, and China. The benchmark  US 10yr Bond yield ended the week at 4.54%, down 8bps from last week closing of 4.62%. Yields elsewhere in the developed market  space were also lower as European Central Bank (ECB) cut rates, though the narrative of higher for longer yields is taking hold in advanced economies on the back of various structural issues, especially concerning the huge amount of debt in advanced economies. 

 

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