Fixed income markets rallied across the curve in the first week of the new financial year. With expectations of an immediate relief on liquidity front and with huge fresh inflows inflow into debt mutual funds, money market rates slid down further. Maximum impact was seen at the shorter end of money market curve where 3 month bank CDs were trading at around 8%, lower by 75bps compared to previous week. Similarly, 1Y bank CDs were trading at around 8.50%, down 25 bps.
Money market rates are now back to the levels traded around the January policy levels, after spiking up in February and now seem aligned to the current repo rate of 7.5%. These rates should now trade in the present range till the next policy review in early May.
Benchmark 10Y bond yields were also marginally down by 2 bps for the week. First auction of the year was absorbed comfortably by the market. There is a distinct trend emerging of the steepening in yield curve. This week, 5Y benchmark yields were down 6 bps. The 10-5 goi spread has now widened by 10bps during the last month.
Lagged effect of tight liquidity and demand destruction due to lower growth and higher interest rates in recent times should continue to moderate inflation. With food inflation still being the most sticky and structural component of inflation, monsoon trends would be most critical. With relatively lighter supply, better liquidity and reasonable valuations given the recent sell-off, bond prices should remain supported in coming weeks.
The author is ED & CIO-Fixed Income for Pramerica Asset Managers Ltd
Money market rates are now back to the levels traded around the January policy levels, after spiking up in February and now seem aligned to the current repo rate of 7.5%. These rates should now trade in the present range till the next policy review in early May.
Benchmark 10Y bond yields were also marginally down by 2 bps for the week. First auction of the year was absorbed comfortably by the market. There is a distinct trend emerging of the steepening in yield curve. This week, 5Y benchmark yields were down 6 bps. The 10-5 goi spread has now widened by 10bps during the last month.
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Most of the metal, food grains excluding rice and energy prices relevant for India like Brent crude prices ended lower for the previous quarter in international markets. Brent crude prices collapsed further in current week closing at over 52 week low of 105 $/bl. That should continue to feed into softer inflation trend as observed in last quarter. Even the consumer price inflation should start trending lower in next couple of months.
Lagged effect of tight liquidity and demand destruction due to lower growth and higher interest rates in recent times should continue to moderate inflation. With food inflation still being the most sticky and structural component of inflation, monsoon trends would be most critical. With relatively lighter supply, better liquidity and reasonable valuations given the recent sell-off, bond prices should remain supported in coming weeks.
The author is ED & CIO-Fixed Income for Pramerica Asset Managers Ltd