2026-10-06 03:03:30 pm | Source: PGIM India Mutual Fund
As the overnight lending rates consistently fell below the policy repo rate, RBI conducted regular interventions in the FX markets both in the spot and the forward swap segments to drain out liquidity apart from announcing a 1 lakh crore OMO sale. The beginning of the month saw a deluge of liquidity hitting the market with yields at the very short end of the money market curve falling sharply before retracing in the middle of the month as RBI announced OMO sale and steeped up its intervention in the FX market to drain liquidity.
As a result of the FCNR flows, the wedge between the deposits and the credit growth in the banking system has narrowed to 1% from 5% couple of months back with deposits growing at 17.30% (YoY) relative to credit growth of 18.1% (YoY). Balance of Payments (BOP) is also expected to close the year in surplus to the tune of USD 40-50bn as a result of the FCNR inflows though current account is expected to remain in deficit at around 1% of GDP.
Consumer Price Index (CPI) inflation came in line with expectations at 4.82% though both food and core inflation registered an uptick. “Core” inflation came in at 4.20%, which suggests some pass-through of higher input costs. Wholesale Price Index (WPI) inflation stayed elevated at 9.92% with “core” WPI at 8.10%. The last 3 months average WPI is at 9.90% with monthly momentum remaining firm in August.
As crude prices remain elevated, amidst firm food prices, inflation (both WPI and CPI) is likely to stay firm with CPI inflation in October (for September month) is likely to rise towards 5.50%. Monsoon has ended with a 14.20% deficit and though spatial distribution has improved considerably of late, risks remain from warm weather and low reservoir levels. Minimum Support Prices (MSPs) for Rabi (winter) crops were announced with an average hike of 5.20% compared to 6.20% last year. Thus, the increase in MSP remains contained and lower than last year‘s levels, limiting the pressure on food inflation.
The government has set the rabi foodgrain production target at 177.7 mt for the current year, up 1.8% from last year's levels. Fiscal deficit (Apr-Aug) came in at 42% of the budget estimates, above the 5-yr average of 33% (for the same period). It is expected that the fiscal deficit target of 4.3% will be met with higher subsidies likely offsetting by corresponding increase in revenues and/or spending cuts. The H2 borrowing calendar was in line with market estimates though it elongated duration with higher issuances at the longer end of the yield curve.
Globally, central banks across the developed world raised policy rates and leaving the door opened for more. The melt up in yields happened as yields crossed key technical thresholds with the benchmark US 10yr bond yield up 53 bps during the month. European bond yields also rose significantly signifying the strong upward momentum in yields across the developed economies which are facing the twin challenge of elevated inflation and higher debt burden.
We expect RBI to raise the policy repo rate by 25 bps and also change the monetary policy stance. Though the market has a consensus view on a 25 bps rate hike, its split on a change in stance and we believe that given the worsening global macro, narrowing of interest rate differentials with rest of the world, increasing probability of higher inflation going ahead, it will be not of way to change the monetary stance along with the start of the rate hiking cycle.
Quote on Monthly Debt Market Outlook by Puneet Pal of PGIM India Mutual Fund
Below the Quote on Monthly Debt Market Outlook by Puneet Pal of PGIM India Mutual Fund
Long-End Yields Face Global Headwinds Despite Ample Liquidity
Bond yields continued their upward trajectory during the month on the back of a melt up in global bond yields and a 14% rise in Brent Crude prices. In an eventful month, money market yields remained anchored, supported by the FCNR inflows which aggregated USD 134 bn, while the longer end of the yield curve remined under pressure due to adverse global bond and geopolitical developments.
As the overnight lending rates consistently fell below the policy repo rate, RBI conducted regular interventions in the FX markets both in the spot and the forward swap segments to drain out liquidity apart from announcing a 1 lakh crore OMO sale. The beginning of the month saw a deluge of liquidity hitting the market with yields at the very short end of the money market curve falling sharply before retracing in the middle of the month as RBI announced OMO sale and steeped up its intervention in the FX market to drain liquidity.
As a result of the FCNR flows, the wedge between the deposits and the credit growth in the banking system has narrowed to 1% from 5% couple of months back with deposits growing at 17.30% (YoY) relative to credit growth of 18.1% (YoY). Balance of Payments (BOP) is also expected to close the year in surplus to the tune of USD 40-50bn as a result of the FCNR inflows though current account is expected to remain in deficit at around 1% of GDP.
Consumer Price Index (CPI) inflation came in line with expectations at 4.82% though both food and core inflation registered an uptick. “Core” inflation came in at 4.20%, which suggests some pass-through of higher input costs. Wholesale Price Index (WPI) inflation stayed elevated at 9.92% with “core” WPI at 8.10%. The last 3 months average WPI is at 9.90% with monthly momentum remaining firm in August.
As crude prices remain elevated, amidst firm food prices, inflation (both WPI and CPI) is likely to stay firm with CPI inflation in October (for September month) is likely to rise towards 5.50%. Monsoon has ended with a 14.20% deficit and though spatial distribution has improved considerably of late, risks remain from warm weather and low reservoir levels. Minimum Support Prices (MSPs) for Rabi (winter) crops were announced with an average hike of 5.20% compared to 6.20% last year. Thus, the increase in MSP remains contained and lower than last year‘s levels, limiting the pressure on food inflation.
The government has set the rabi foodgrain production target at 177.7 mt for the current year, up 1.8% from last year's levels. Fiscal deficit (Apr-Aug) came in at 42% of the budget estimates, above the 5-yr average of 33% (for the same period). It is expected that the fiscal deficit target of 4.3% will be met with higher subsidies likely offsetting by corresponding increase in revenues and/or spending cuts. The H2 borrowing calendar was in line with market estimates though it elongated duration with higher issuances at the longer end of the yield curve.
Globally, central banks across the developed world raised policy rates and leaving the door opened for more. The melt up in yields happened as yields crossed key technical thresholds with the benchmark US 10yr bond yield up 53 bps during the month. European bond yields also rose significantly signifying the strong upward momentum in yields across the developed economies which are facing the twin challenge of elevated inflation and higher debt burden.
We expect RBI to raise the policy repo rate by 25 bps and also change the monetary policy stance. Though the market has a consensus view on a 25 bps rate hike, its split on a change in stance and we believe that given the worsening global macro, narrowing of interest rate differentials with rest of the world, increasing probability of higher inflation going ahead, it will be not of way to change the monetary stance along with the start of the rate hiking cycle.
Above views are of the author and not of the website kindly read disclaimer
Disclaimer:
The content of this article is for informational purposes only and should not be considered financial or
investment advice. Investments in financial markets are subject to market risks, and past performance is
not indicative of future results. Readers are strongly advised to consult a licensed financial expert or
advisor for tailored advice before making any investment decisions. The data and information presented
in this article may not be accurate, comprehensive, or up-to-date. Readers should not rely solely on the
content of this article for any current or future financial references.
To Read Complete Disclaimer Click Here
Latest News
Baroda BNP Paribas MF announces IDCW under Arbitrage...
UTI Asset Management Company announces change in ris...
Civil Aviation Secretary asks airlines to finalise N...
Navi Mumbai International Airport steps up mobility,...
Structural reforms, e-commerce among key focus areas...
Tablet shipments moderate as memory cost inflation p...
India`s first indigenous HPV vaccine gets WHO prequa...
Indian manufacturing sentiment rebounds in Q2 FY27
DRDO successfully tests indigenous High-Altitude Air...
India's data centre boom raises power, cyber and inf...
