Economy News

CRISIL expects rate cut in June, says 10-year yield may be range bound

CRISIL expects the first interest rate cut in June at the earliest, if not later. While fiscal prudence has smoothened the path for monetary policy, the RBI is wary of cutting rates or changing stance too soon given inflation is not fully tamed yet, it said.

In February, the 10-year benchmark government security (G-sec; 7.18% GS 2033) opened at 7.06 per cent and closed at 7.08 per cent, down 6 basis point (bps) from its January close of 7.14 per cent while staying within CRISIL’s forecast range of 7.03-7.13 per cent. Per a CRISIL report, the 10-year benchmark G-sec yield is expected to be in the range of 6.96- 7.06 per cent. It stated that advance tax outflows and GST collection may put pressure on liquidity in the system and impact yields negatively, but a pickup in government spending, reversal of dollar/ rupee sell-buy swaps, FPI and domestic inflows into the debt market can support yields.

For the three-month view, CRISIL stated that global interest rates, continued foreign capital inflows and the government’s borrowing calendar for fiscal 2024 can impact yields positively, while liquidity concerns may impact negatively. Per the estimates, 10-year benchmark G-sec yield at the end of May 2024 will be in the range of 7.03-7.13 per cent.

In the first week, the 10-year benchmark traded on an optimistic note on announcement of a fiscally prudent vote on account and lower-than-expected borrowing for FY 24-25. A decline in US treasury yields and crude oil prices also supported the yield. 

During the second week, the yield soared to a high of 7.11 per cent as the RBI retained its policy stance of “withdrawal of accommodation” and the US Treasury yields rose amid a higher-than-expected US inflation print of 3.01 per cent for January 2024, said the report. US Treasury yields hardened 13 basis points to close the week at 4.30 per cent. However, the 10-year G-sec yield remained in the 7.09-7.11 per cent range as the CPI print came in at 5.1 per cent, down 60 bps on-month. CPI inflation moderated to a three-month low of 5.1 per cent in January due to a drop in prices of several items in the food basket — mainly onions, data released by the National Statistical Office (NSO) showed. The CPI-based inflation came in at 5.69 per cent in December 2023 and 6.52 per cent in January 2023.

As the month progressed, strong buying support from domestic players supported yields and foreign portfolio investment (FPI) inflows into the debt market hit a six-year high of Rs 22,419 crore, the report stated.  

Amid tight liquidity in the banking system, the bond market witnessed a yield-curve inversion between short term treasury bills and 10-year G-secs, wherein the 182-day and 364-day T-bills traded above the 10-year benchmark throughout February.

The Monetary Policy Committee (MPC) meeting minutes were broadly in line with market expectations, with a clear focus on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

This month, advance tax outflows, Goods and Services Tax collection and the fiscal-end effect might put pressure on liquidity in the system, but a pickup in the government’s spending and reversal of dollar/rupee sell-buy swaps will absorb the impact, CRISIL maintained. CRISIL provides its outlook on key benchmark rates for different debt classes — 10-year G-secs, SDLs (state-development loans), and corporate bonds (CBs). 

Factors influencing the outlook

GDP growth: CRISIL expects real GDP growth to moderate to 6.8 per cent in fiscal 2025 from 7.61 per cent this fiscal. High interest rates and lower fiscal impulse, it added, will temper domestic demand. Uneven growth in key trade partners will restrict healthy export recovery. But budgetary support to capex and rural incomes will support growth. 

CPI inflation: Per the estimates, consumer price index (CPI)-linked inflation is expected to soften to 4.5 per cent in fiscal 2025 from an estimated 5.5 per cent this fiscal. “Cooling domestic demand and healthier farm output should help moderate inflation next fiscal. A non-inflationary budget that focuses on asset-creation rather than direct cash support bodes well for core inflation,” it said. CPI inflation eased to a three-month low of 5.1 per cent in January from 5.7 per cent in December.

RBI’s monetary policy: CRISIL expects the first interest rate cut in June at the earliest, if not later. While fiscal prudence has smoothened the path for monetary policy, the RBI is wary of cutting rates or changing stance too soon given inflation is not fully tamed yet, it said. 

Fiscal healthThe budget has targeted a reduction in the centre’s fiscal deficit to 5.1 per cent of GDP in fiscal 2025 from 5.8 per cent of GDP this fiscal. Gross market borrowing is estimated at Rs 14.1 lakh crore for fiscal 2025, 8.4 per cent lower on-year. In the first ten months of this fiscal, centre’s fiscal deficit stood at 63.3 per cent of the budget target, compared with 67.8 per cent in the same period last year. 

Crude oil prices: The report stated that crude prices are expected to remain in the $80-$85 per barrel range in fiscal 2025. Brent crude oil prices increased to $83.8 per barrel average in February, 4.4 per cent higher on-month and 1.3 per cent higher on-year.

Current account balance: The CRISIL estimates stated that current account deficit (CAD) is expected to average 1.0 per cent of GDP in fiscal 2025, the same as its estimate for fiscal 2024. Benign international commodity prices and support from healthy services trade surplus and remittances will keep CAD in check, it said.

US Federal Reserve’s stance: S&P Global expects the Fed to start cutting rates around mid-2024, with cumulative rate cuts of 75 bps by 2024 end. The Fed kept its policy rate unchanged at 5.25-5.50 per cent for the fourth consecutive time at its January meeting.

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