• A sharp rally was seen in debt market  in the month with yields falling across money markets, corporate bonds and gilts helped Investors to Gain Extra Returns on the Portfolio,  Stable inflation, Sufficient  banking system liquidity, expectations of rate cut by FoMC and positive announcements in the Budget were the main reasons. • The newly appointed Finance Minister positively surprised the debt markets by keeping all fiscal deficit targets intact as laid out in the Interim Budget including the Gross borrowing, Net borrowing, switches and buybacks as well as the fiscal deficit target. The mention of sovereign bond issuance in foreign currency as a diversification and to alleviate demand pressures domestically was also a key reason for rally in gilt markets.
• The ten yr gilt benchmark closed the month at 6.37%, 51 bps lower than previous month. The ten yr AAA Corporate bond benchmark closed at 7.65%, 42 bps lower than previous month. The five yr AAA corporate bond benchmark closed at 6.88%, 30 bps lower as compared to previous month. Ten yr SDL remained in a range of 55-65 bps to the ten yr gilt benchmark.
• 1 year CD rates closed sharply lower at 6.88%, 30 bps lower than previous month. 1 yr T bill yield closed 30 bps lower at 5.93%. 3 month CD rates closed at 6.27, 18 bps lower than previous month. Brent Crude oil prices was range bound during the month around USD 64 per barrel. INR mildly appreciated to 68.8 as compared to Rs 69.03 in previous month. For the month of July, FPIs were net buyers in the debt market to the tune of Rs 5450 cr. India’s June trade deficit came in at USD 15.28 bn, similar levels as previous month.
• As expected the US FoMC in their meeting held towards month end reduced key rates by 25 bps.The federal funds rate is now in the band of 2-2.25%.
• June CPI data release came in at 3.18%, slightly higher than 3.05% in the previous month. WPI for June came at 2.02% compared to 2.45% in previous month.
• May Industrial production (IIP) growth came at 3.1% compared to 4.3% for previous month.
• For the month banks lent on an average Rs 128561 Cr at various RBI liquidity facilities put together reflecting ample liquidity conditions.
• Outlook: • We expect Banking System liquidity to continue to remain well within the surplus zone and therefore RBI may not conduct any further liquidity injection measures.
• We think there is a high probability of RBI MPC cutting key rates by 25 bps at the upcoming policy review.
• Short term rates have sharply come down on back of expectations of rate cut and improvement in liquidity. We expect money market rates to overall remain benign during the month. Considering the probable Slowdown in the Economy, Government may ask RBI to lower the Interest Rates further to bring down the Cost of borrowings for the Industries to support the Complete use of the Capacity. Considering the Festive Season ahead, Lower Interest rates shall help many sectors to witness higher Consumer Demand thus shall result in better Quarterly Results in the later part of the Fiscal year.