February fare

The yield on the 10-year benchmark government security (G-sec; 7.18% GS 2033) opened February at 7.06% and closed at 7.08%, down 6 basis point (bps) from its January close of 7.14% and within CRISIL’s forecast range of 7.03-7.13%.

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% as the Reserve Bank of India (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% for January 2024. US Treasury yields hardened 13 basis points to close the week at 4.30%. However, the 10-year G-sec yield remained in the 7.09-7.11% range as the CPI print came in at 5.1%, down 60 bps on-month.

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.

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.