In January 2024, there was a fixed income moderation in government securities (G-Secs) yields, with the 10-year G-Sec yield closing at 7.14%, three basis points lower than the end of December 2023. Factors such as consistent buying of G-Secs by foreign institutional investors (FIIs), a stable domestic consumer price index (CPI), a rise in oil prices, and strong momentum in the US economy influenced the fixed-income markets.
Despite this, corporate bond spreads over G-Secs remained mostly unchanged during the month. Interbank liquidity saw a decline due to an increase in currency in circulation and elevated government balances, keeping the overnight rate close to the upper end of the Reserve Bank of India’s (RBI’s) policy corridor. |
Foreign portfolio investors (FPIs) bought debt worth US$ 2.3 billion in January 2024, contributing to a cumulative purchase of debt worth US$ 9.5 billion in 10 months of fiscal year 2023-24. During the Interim Budget 2024-25 on February 1, 2024, the central government announced a fiscal deficit and market borrowings for FY25 lower than market expectations. This led to a broad-based rally in yields.
Looking forward, the fixed-income outlook remains positive due to several factors:
Lower-than-expected budget deficit and market borrowings improve demand-supply balance, especially with India’s inclusion in the JP Morgan bond index in FY25. Subdued core consumer price index (CPI) momentum driven by lower input prices and benign global commodity prices, alongside anchored inflation expectations. Potential easing of global central banks, including the US Fed, and anticipated liquidity easing and policy rate reductions by the RBI in the coming quarters. India’s external sector resilience due to high foreign exchange reserves, stable oil prices, strong services exports, and expected FPI inflows into debt markets in FY25.
However, there are certain risks to this positive outlook:
High statutory liquidity ratio (SLR) holdings and robust credit growth in the banking system may limit incremental demand for G-Secs. Potential food price shocks could elevate headline CPI and impact inflation expectations. Geopolitical tensions could disrupt exports and lead to oil price spikes. In conclusion, experts anticipate yields to trade with a downward bias, with the long end likely to outperform over the medium term. While short to medium-duration debt funds remain recommended, investors may consider a higher allocation to longer-duration funds based on individual risk appetite.
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