During 2024, g-sec yield is likely to witness range bound movement with downward biases. Factors like RBI’s rate action, inflation, fiscal deficit, system liquidity and global factors will influence g-sec yield movement.
RBI has maintained status quo on policy repo rate in the wake of current macroeconomic scenarios. Taming inflation at around 4% is now the central bank’ priority. Policy rate cut can be considered after abatement of inflation. In the last MPC meeting, RBI has projected inflation at 5.2% for Q4FY24, 5.2% for Q1FY25, 4% for Q2FY25 and 4.7% for Q3FY25. Therefore, it creates a rate cut scenario towards the end of 2024 assuming all other factors to stand as normal. In that case, g-sec yield may fall.
Fiscal Deficit-Owing to higher tax collection, Government of India is likely to achieve fiscal deficit target of 5.9% of GDP which will help g-sec yield to remain subdued as GoI will follow fiscal consolidation path in coming fiscal years. Continuing the path of fiscal consolidation, the government aims to bring the fiscal deficit below 4.5% of GDP by 2025-26.
Current Account Deficit-Domestic current account deficit stood at 1% of GDP during Q2FY24 as compared to 1.1% of GDP during Q1FY24 and 3.8% Q2FY23. The improvement in CAD has been attributed to lower merchandise trade deficit and growth in service export.
Inclusion of Indian g-sec in JP Morgan Emerging Bond Index- The much awaited inclusion of GoI securities to JP Morgan Emerging Bond Index is going to take place from 28th June 2024. It will attract more foreign investors to the Indian debt market which is likely to have a positive impact on gilt securities.
US Treasury yield-In the current macroeconomic scenario of the US, there is a rate cut scenario created by FOMC in 2024. As per latest data, U.S. payrolls increased by 216,000 in December as compared to earlier estimated data of 170,000 which indicates the healthy condition of the labour market. The unemployment rate stood steady at 3.7%, versus the 3.8% expected. Therefore, a 25 bps rate cut may be expected during the first half of the current year which will keep treasury yield stable with a downtrend level.
System Liquidity-During 2023, system liquidity experienced zigzag movement driven by various factors such as status quo of policy rates, incremental CRR by the central bank. System liquidity declined significantly to Rs 1150 billion of deficit as of 3rd Jan. Going ahead, the system is likely to remain volatile with a bias towards deficit as RBI may announce OMO sale at any point of time.
Government bonds, SDL and OIS yield movements
During the past week, there were several notable changes in bond yields:
The yield for the 10-year benchmark 7.18% 2033 bond yield rose by 6 bps to 7.23%. The 7.06% 2028 bond's yield rose by 2 basis points to 7.11%. 7.18% 2037 bond yield rose by 6 bps to 7.35%. In the same line, the long-term paper, represented by the 7.25% 2063 bond, its yield increased by 6 bps to 7.47%. 50-year paper, 7.46% 2073 yield stood flat at 7.37%.
The spread between the 10-year and 5-year bonds rose to 12 bps from 9 basis points as compared to the previous week. The spread between the 15-year benchmark and the 10-year benchmark increased to 16 bps from 11 bps. Additionally, the spread between the 30-year benchmark and the 10-year benchmark remained unchanged at 22 bps as compared to the previous week.
Lastly, in the Overnight Indexed Swap (OIS) rates, the 1-year OIS yield rose by 2 bps to 6.67%, while the 5-year OIS yield increased marginally by 6 bps to 6.27%.
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