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INR government bonds kickstarted the week on a softer note, in midst of a subdued currency and tight onshore liquidity. Cancellation of a bond sale on Friday (seven-year auction) was perceived as a sign of the central bank’s discomfort with high yields. Banking system liquidity has been choppy around the neutral mark in the past fortnight, occasionally slipping into red on frictional and seasonal triggers, while a steady pipeline of initial public equity offerings has temporarily diverted liquidity from the secondary markets. The RBI might meet selected primary dealers and banks on Tuesday to discuss current market conditions, including liquidity, according to press reports. The currency was back near fresh lows on a bid US dollar as well as absence of further announcements on the trade deal with the US. Caution over strong intervention has prevented USDINR from breaching 88.90 mark, before the psychologically key 90. Foreign holdings of India’s index-linked government bonds rose in October (FAR holdings rose by $1.5bn) as investors sought relatively attractive returns, displayed duration interest, spurred by a better debt supply mix and a favourable macro environment, including low inflation. Cues from US bonds also need to be monitored in this context. We see room for a modest pullback in INR long-end yields by end of the fiscal year, while the short-end takes direction from RBI’s policy guidance.
Official commentary and incoming data are under watch. Inflation data out later this month will show a further moderation, while market participants monitor the durability of demand after the passage of GST tax relief. Early data suggests that the indirect tax boost, above normal rains as well as festivities have helped to spur strong demand for automobiles, two-wheelers, white goods (durables), apparels etc., besides higher usage of digital transactions and firm banks’ credit growth. In this context, the slower pick up in Oct GST collections (capturing Sep transactions) at 4.6% yoy vs 9.1% yoy month reflected consumers delaying their purchases until lower rates kicked in the last week of Sep (read note). Testament to this, domestic GST receipts eased (2% yoy vs Sep’s 6.8%), while imports-related transactions remained firm. November’s GST data (capture Oct’s trend) will be watched closely to gauge if a discernible pickup in volumes makes up for a shortfall in the value of transactions (due to lower tax rate overlay). We don’t expect any compromise on meeting the FY26 fiscal deficit targets, with a shortfall in net direct tax collections and centre’s GST revenues likely to be compensated by a recalibration in spending outlays.
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