Debt Market Review

Mr. Avnish Jain
Head - Fixed Income

Outlook:

Global:

Global economy is likely to be marked by slow growth, moderating but elevated inflation, peaking policy rates, and continuing geo-political risks.
Inflation seems to have peaked in major countries, though reasons to cheer may still be far away.
The sharp rise in rates by theUSFED and other central banks points to the seriousness of this inflation problem.
AE inflation is in the high single digits and in some cases is in double digits. The mandate in these countries is to have inflation around the 2% mark. While the sharp rate hikes are coming to an end, with the US FED slowing down to 50bps in Dec 22 FOMC (Federal Open Market Committee) meet, most of the central banks are of the view that rates may have to stay higher for longer for the inflation genie to be put back into the bottle. This view seems to conflict with general market consensus that FED may start easing in end 2023 (and other central banks following suit) whilst the FED projections point to easing starting 2024. AE Central banks may be reluctant supporters of growth in backdrop of unprecedented high inflation and may err on the side of caution, waiting for inflation to trenddownmeaningfully.
India:
In India, macro situation is better. Growth while remaining resilient is likely to slow down to below 6% in FY2024.

CPI inflation has fallen to below 6%. RBIMPChas already delivered 225 bps rate hike taking repo rate to 6.25%. Inflation has receded from highs of 7.8% in April 22 to 5.90% in Nov 22. While this is a positive development, core inflation remains sticky above 6%, a concern flagged by RBI MPC as well. Expectations of 25bps hike to take repo to 6.5% are priced in by the market. India macro conditions are likely to be punctuated by global demand slowdown in the shadow of volatile geo-politics with risks of persisting negative surprises.

The rupee (INR) has depreciated 10.39% against the US$ (3/Jan/22 to 16/12/22). This is broadly in line with other major currencies as a sharp rise in US rates has led to unprecedented appreciation of theUSD against major currencies.

A persistent rise in trade deficit on the back of slowdown in exports, has impacted INR value, though positive FII equity flows in Oct/Nov 22, helped the INR to recover. Going to end of fiscal 2023, INR could trade in range of 81-84/US$.
Source: RBI, MOSPI, CMIE, FIMMDA, NSDL, Bloomberg, ICRA Analytics Ltd.