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1. DEBT OUTLOOK
What Went By
Global bond markets continued to sell off amidst improved economic outlook, rise in commodity prices,
and resultant higher inflation expectations. Globally, the increase in bond yields was led by the long end of
the curve possibly suggesting markets being more fearful of the increased bond supply and inflation surge
rather than premature tightening. The sell-off for Indian bonds started from the budget day with
announced fiscal deficit and consequent government borrowing much higher than consensus expectations
(Fiscal deficit for FY 21 at 9.5% and for FY 22 at 6.8%; market estimates 7% and 5.5% respectively) and
continued with the rise in global bond yields amidst an intermittent central bank support. India, however,
was a notable exception where the 10-year benchmark government bond continued to be an outperformer
due to stronger central bank intervention although still ended 17bps higher at 6.23% at the month end.
Points on the curve where RBI did not intervene as aggressively as the 10-year benchmark closed much
higher with the rest of the curve repricing 35-50bps higher.
3QFY21 real GDP grew 0.4% (Consensus: 0.6%) led by investment (GFCF) growth of 2.6%. Private
consumption grew -2.4% (-11.3% in 2QFY21) while government expenditure grew (-)1.1% (-24% in 2QFY21).
For full-year, the CSO revised down its GDP growth estimate to -8% YoY (from -7.7% earlier). On the supply
side, GVA growth picked up to 1% YoY in Q4 vs -7.3% in Q3. Agricultural GVA growth rose at a faster pace
(3.9% YoY in Q3 from 3% in Q2), aided by robust food grain production, while non-agricultural GVA growth
rose 0.3% from -8.6%, led by a recovery in both the industrial and services sectors.
January’21 CPI inflation fell to 4.06% (4.59% in December’20), below the Bloomberg consensus of 4.4% led
by a sharp drop in vegetable prices; with core inflation holding steady. Food inflation slowed further from
3.9% in December’20 to 18-month low of 2.6% in January’21 compared to 8.1% average seen between
April-Dec 2020. Core CPI inflation remained stable at 5.5% YoY in January’21.
IIP growth rose to 1.0% YoY in December’20 vs -2.1% in November’20, above expectations (Consensus: -
0.1%). Mining production fell 4.8% while manufacturing was up 1.6%. Consumer durables production grew
4.9%. Consumer non-durables and capital goods production increased 0.6% and 2%, respectively.
The MPC minutes for February’21 policy suggested comfort amongst MPC members with the current
accommodative stance. Members continue to highlight upside risks to inflation, but view downside risks to
growth as being more significant and in need of continuing policy support. Comments by the RBI members
on liquidity policy, suggest that RBI might continue to try to curb significant moves higher in long-term
rates, and that the central bank is likely to replenish the durable liquidity reduction (~1.5tn INR) on cash-
reserve ratio hikes in March’21 and May’21 this year by further bond purchases in coming months.
RBI released the Report on Currency and Finance (RCF). The report assesses that the current inflation target
band of 4% +/- 2% remains appropriate for the next five years. The report states that the MPC size and
composition, decision-making process, communication practices and accountability mechanisms are in line
with international best practices, while noting that some operational aspects of forward guidance, the
release of MPC minutes and transcripts, and the onboarding process for MPC members may warrant an
evaluation.
March 2021

2. Outlook
The global reflation trade is completely logical in its direction of pricing. Some acceleration in the trend may
also have been justifiable as the size of US fiscal response picked up. However, it is still likely that bulk of
this adjustment may have run its course for now and the repricing now falls back to a more sustainable
pace. There may even be givebacks from time to time as market adjusts to a most likely pace of change.
There is also an element of longer term repricing here as for example to US inflation expectations and
hence the neutral Fed funds rate. This will unlikely be called into question while we are in the current bout
of reflation. The key test to these will come when the pent up phase is done and we have a “cleaner” set of
data and drivers to work with. As for our local bond markets while our ongoing cyclical recovery and
eventual improvement in perceived credit profile may argue for a gradual reduction in yield spreads over
developed markets over time (as what happened in the pre-2008 period) which may reduce the impact of
say US yield changes into ours, the near term correlations may nevertheless be strong enough. However, it
is really the pace of change in bond yields that matters. When yield curves are this steep, one can no longer
think only in terms of being “long or not”. Additionally, the traditional way of thinking about risk reduction
through moving to short duration money market assets may not work in an environment where it is
actually the overnight rate that needs to shoulder the bulk of the readjustment ahead and hence assets
most closely priced off the overnight rate may be at the most risk of readjusting. It is for this reason that
some amount of “bar-belling” alongside exposure to quality roll down products may make sense. It is
relevant to note that these strategies account for a rise in yields over the period ahead, and the possible
volatility can be mitigated by having reasonably long investment horizons.
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DOCUMENTS CAREFULLY.
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