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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 current stance of RBI is to support growth and it has taken a proactive approach towards liquidity management. Bond markets are  expecting another rate cut in the MPC meeting in April along with some other dovish measures on liquidity or a change in monetary  policy stance. Financial year end profit booking by banks has put a floor on bond yields currently 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. We  expect traditional year end buying from insurance companies and other real Money Market participants to continue to support the longer  end of the yield curve till March end 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.

Bond yields came down during the week supported by the proactive stance of RBI on liquidity and increasing expectations of a dovish  MPC meeting in April. RBI announced another OMO of INR 50,000 cr, which means that the durable liquidity is surplus in the system  though the actual liquidity remains in deficit due to advance Tax and GST outflows. We expect the actual liquidity to turn surplus as  government spending picks up over the next month. Yields came down by 5-10bps across the curve with the benchmark 10yr bond yield  ending the week at 6.63%, down 7 bps on the week.  

Yields at the longer end of the yield curve came down by 5bps and witnessed some profit booking as yields went below 7%. So far, this  month, the longer end of the yield curve has outperformed. Demand at SDL auction was also better than expected. We view the current  outperformance of the longer end of the yield curve being driven by lack of primary supply and general financial year end demand by  real money players. The goods trade deficit for February narrowed to USD 14bn and the services trade surplus rose to USD 18.5bn as  the overall trade balance turned into surplus. Imports were lower by 16.30% (YOY) and Exports fell 10.90% (YOY). This trade surplus  of USD 4bn was the first since May 2021. Some analysts have revised lower their forecast of the Current Account Deficit to  0.6%-0.80% from earlier 1% for FY25.  

RBI continues to adopt a proactive stance on liquidity management and this coupled with lower inflation last week has increased expectations of a dovish April MPC meeting in the bond markets. The market is expecting something more over and above a rate cut  from the April MPC meeting. Some market participants are expecting a change in the monetary policy stance along with rate cut and  there is an air of optimism in the bond markets in the run up to the April MPC meeting.  

Money Market yields in the 1yr bank CD maturity segment came down by almost 10bps as Mutual Funds look to increase their allocation  in that segment ahead of the financial year end. The 3 month maturity Bank CD yields remained stable and continued to trade in the  range of 7.50% to 7.55%, down 5 bps from last week.  

The OIS curve also came down with the 1yr OIS moving lower by 3 bps while the 5yr OIS was lower by 10bps. The OIS curve remains inverted unlike the sovereign curve.

INR appreciated 1.18% against USD ending the week at 85.97, even as the Dollar Index strengthened to 104.09 higher than last  week’s closing of 103.72. FPI inflows into debt continued to be positive with almost USD 2.50 bn inflow so far in the month of March.  
 

International  Markets

Globally, bond yields were stable and came down as the US Fed meeting concluded on expected lines with the Fed maintaining the  status quo on rates while slowing down the pace of Quantitative Tightening (QT). The Fed chairman Powell downplayed a recession and  commented that effects of tariffs might be transitory. The runoffs in treasury securities were slowed to USD 5bn/month from 25bn  while on MBS, it was maintained at USD35bn. The long term neutral rate was held constant at 3% and the dot plot showed 50bps rate  for CY2025. Projections of growth were reduced and that of Inflation were raised. Bank of Japan (BOJ) held rates steady, though

Japanese core Inflation came in higher than expectations and markets factoring in future rate hikes.  

The benchmark US 10yr Bond yield ended the week flat at 4.25%, down 6 bps on the week. European bond yields also came off a tad with the German benchmark 10yr bond yield ending the week at 2.76%, down almost 10bps though markets expect bond yields in  Europe to keep rising in response to the change in the fiscal stance.