5 Jun 2023

Growth, fiscal deficit and inflation dynamics favour an extended pause in rates

Domestic GDP growth rate stood at 7.2% for FY23 while fiscal deficit has met budgeted target for last fiscal year. Considering these factors and inflation dynamics favour an extended pause in policy repo rates going ahead.

author dp
Team INRBonds
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India’s consumer inflation fell to touch an 18-month low level at 4.70% in April. During the month, food inflation moderated to 3.84%. Core inflation stood at 5.2% during the mentioned month. On the assumption of a normal monsoon, inflation is expected to remain moderate in coming months.

System liquidity has regained surplus level since April 23. As of 1st April 23, it stood at Rs 2401 billion.                

Considering US inflation, it fell to 4.9% in April 23 from the peak level of 9.1% in June 2022. Therefore, the US FOMC is expected to pause rate hikes in its forthcoming meeting as it has already indicated the end of rate hike cycle. The euro zone’s annual inflation rate also fell to 6.1% in May from 7% in April.

Considering both domestic and global factors, it is expected that RBI will continue with the pause in policy repo rate hike in forthcoming policy meeting.

Fiscal Deficit- India’s fiscal deficit has stood at 6.4% for FY23 as budgeted by the Union Government driven by higher tax collection. During FY23, direct tax collection stood at Rs 16.61 trillion while GST collection increased by 22% on yearly basis to Rs 18.1 trillion.

Gross Domestic Product- During Q4FY23, India’s GDP growth stood at 6.1% on yearly basis. For FY23, GDP expanded by 7.2% as compared to 9.5% growth in FY22.

Government bonds, SDL and OIS yield movements

On a weekly basis, the 10-year benchmark 7.26% 2033 yield came down by 3 bps to 6.98% while 7.26% 2032 yield stood lost 3 bps to 7.02%. 7.06% 2028 yield came down by 4 bps to 689%. 5.63% 2026 yield lost 1 bp to 6.85%. Long-term paper, 7.40% 2062 yield rose by 3 bps to 7.18%.

The spread of 10-year bond over 5-year bond increased to 9 bps from 8 bps as compared to the previous week. The 15-year benchmark over 10-year benchmark rose to 10 bps from 8 bps while the 30-year benchmark over 10-year benchmark spread increased to 20 bps from 14 bps on a weekly basis.

10-yr SDL auction cut-off yield rose to 7.37% from 7.34% in previous week while spread increased to 36 bps from 35 bps as compared to previous week.  

On a weekly basis, 1-year OIS yield rose by 1 bp to 6.57% while the 5-year OIS yield decreased by 9 bps to 5.99%.

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