Topic 2: DEBT MARKETS: TUNING TO WORLD

In November 2024, the Indian debt market faced significant volatility influenced by various macroeconomic factors and the outcome of the U.S. Presidential elections. The benchmark 10-year government bond yield fluctuated within a narrow range of 6.75% to 6.85% during the month. This stability followed a period of initial rallying after the Reserve Bank of India's (RBI) unexpected shift to a "neutral" monetary policy stance in October, where the repo rate was maintained at 6.50%. FII debt investments experienced outflows after substantial inflows of nearly USD 17 billion throughout 2024. This trend was largely attributed to uncertainties surrounding U.S. economic policies post-election, which influenced investor sentiment towards emerging markets like India. The re-election of Donald Trump introduced both opportunities and risks for the Indian economy and debt market. Some analysts anticipated that Trump's administration would pursue expansionary fiscal policies, potentially leading to higher inflation and interest rates in the U.S., which could adversely affect capital flows to India. The strengthening of the U.S. dollar by approximately 4% since late September exerted additional pressure on emerging markets, including India. Higher U.S. yields typically attract capital away from riskier assets, which could result in increased borrowing costs for India as investors seek higher returns elsewhere. Lastly, domestic inflation numbers were projected at around 4.2% for Q4 FY25, indicating that while inflationary pressures existed, they were manageable enough for the RBI to consider future rate cuts. However, concerns over a potential increase in the fiscal deficit due to higher government spending could keep interest rates elevated in the short term. Investors opting for shorter-duration funds are expected to offer higher yields with lower risk exposure amid changing interest rates, or investors may choose medium-long duration funds since they benefit from anticipated future rate cuts has stable economic conditions. While December 2024 would bring domestic and global challenges in the interest rate scenarios which would affect the yields in the debt market. Upcoming RBI’s MPC meeting would be less likely to introduce any immediate rate cut due to rising inflation pressures, following a surge in food prices inflation and CPI inflation rate reaching 6.2% in October 2024. On the global front, the US Fed is likely to announce a potential rate cut in December 2024 which impact global interest rates and investor sentiment towards emerging markets like India. Rising commodity prices due to geopolitical tensions or fiscal stimulus from other countries like China would further depreciate India’s inflation numbers impacting the economic conditions. December would present challenges such as rising inflation and fluctuating bond yields for the Indian debt market.