Debt Market Review
Mr. Avnish Jain
Chief Investment Officer – Fixed Income.
Macro Review & Fixed Income Market Outlook
Global Economy Update:
Macro Backdrop:
• Global growth remains moderate but increasingly fragile, with financial markets turning volatile amid rising geopolitical risks and elevated energy prices.
• Recent market movements indicate a risk-off sentiment, with equities under pressure and bond yields reacting to inflation concerns.
Oil Price Impact:
• Global crude oil prices have surged sharply, crossing $110–$120 per barrel in April 2026, driven by supply disruptions and geopolitical escalation.
• This has introduced a strong inflationary impulse globally, increasing the likelihood of delayed monetary easing by major central banks.
• Central banks such as the U.S. Federal Reserve and European Central Bank are expected to remain cautious, as rising energy prices complicate the disinflation trajectory and may delay rate cuts.
Supply Chain & Trade Disruption:
• Alongside geopolitical risks, continued tariff measures by major economies and disruptions in key shipping routes have led to higher freight costs, supply chain bottlenecks and trade fragmentation, impacting global trade flows.
• The current crisis represents one of the most significant energy supply disruptions in recent decades, raising concerns about sustained elevated oil prices and broader commodity inflation, particularly if the conflict persists.
Global Inflation Trends:
• Headline CPI inflation has gradually eased but remains above target in some major AEs (Advanced Economies).
• Inflation in the US, has been broadly stable but above target. PCE (Personal Consumption Expenditure) inflation has witnessed a slight uptick in recent months, reflecting higher energy prices and shelter cost amid persistent services inflation.
• In the UK, headline inflation has been trending lower since H2:2025, mainly due to easing services inflation amid slower wage growth, although it remains above target.
• In the euro area, headline inflation, which had remained close to the 2.0 per cent target in Q4:2025, dipped to 1.7 per cent in January 2026, but rose thereafter to 2.5 per cent in March 2026, largely on account of higher energy inflation.
• In Brazil, headline CPI has been gradually converging towards target on the back of monetary tightening undertaken earlier.
• In South Africa, headline inflation has remained within the target band with the recent decline driven by transportation costs.
• In Russia, CPI inflation has been on a disinflationary path.
• China’s headline CPI inflation remained positive, with February 2026 posting the sharpest rise since January 2023 due to Chinese New Year related spending.
• Overall, while inflation remains contained in many economies, the recent rise in energy prices has increased upside risks, calling for cautious adjustments of monetary policy paths.
Purchasing Managers’ Index (PMI):
United States:
• The S&P Global US Manufacturing PMI was revised upward to 54.5 in April 2026, from a preliminary estimate of 54.0 and above March’s 52.3, indicating the strongest expansion in the manufacturing sector since May 2022.
Eurozone:
• The S&P Global Eurozone Manufacturing PMI climbed to 52.2 in April 2026, its highest in nearly four years, up from 51.6 in March and matching initial estimates.
Indian Economy Update:
Macro Backdrop:
• India continues to demonstrate strong domestic growth momentum, supported by consumption and government spending. However, external shocks are emerging as key risks, particularly from rising crude oil prices.
• Recent state election outcomes (April-May 2026) have reduced near-term political uncertainty and provided policy continuity visibility, which is supportive for market sentiment.
• However, any post-election policy adjustments, particularly on fuel pricing, remain a key monitorable.
Purchasing Managers’ Index (PMI):
• India’s HSBC Manufacturing PMI came in at 54.7 in April 2026, revised down from the preliminary estimate of 55.9 but still up from 53.9 in the previous month.
• While both output and new orders continued to expand, the pace of growth remained subdued compared to levels seen over the past three and a half years.
Impact of Oil Shock & Trade Disruptions:
• High Import Dependence Risk: IIndia imports a significant portion of its crude oil through the Strait of Hormuz, making it highly vulnerable to supply disruptions and price spikes in the event of prolonged conflict.
• Fuel Price & Policy Dynamics: Despite global oil spikes, the government has maintained stable retail fuel prices during the election period, cushioning inflation in the near term. However, delayed price adjustments could create future fiscal or inflationary pressures.
• External Sector and Trade: Disruptions in the Strait of Hormuz have already begun impacting exports, freight costs and trade flows, particularly with Middle East partners, indicating near-term external sector vulnerability.
• Policy Trade-Off for RBI: The Reserve Bank of India may face a policy trade-off between supporting growth and managing imported inflation, potentially limiting any monetary easing in the near term.
• Sectoral Impact: Oil-intensive sectors such as aviation, logistics, paints and chemicals may face margin pressures, while upstream energy companies may benefit from higher realizations.
Domestic Inflation Trends:
• Headline CPI (Consumer Price Index) inflation for March 2026 stood at 3.40% year-on-year, a slight increase from February’s 3.21%.
• This rise, driven by 3.87% food inflation, hit a 12-month high.
• Rural inflation was higher at 3.63%, while urban inflation was 3.11%.
Inflation Rates - CPI-Combined Inflation:
Bond Yields & Spreads:
• US FED held rates in May 2026 policy meeting, as geo-politics remains volatile.
• 3 Members of US FED dissented against the policy language, indicating wide difference of opinions within the US FED.
• While US-Iran ceasefire was announced on April 8, 2026, the tension in Strait of Hormuz aided renewed tensions.
• US 10Y rose from about 4.20% levels to around 4.40% at April end on standoff in Strait of Hormuz.
• USD INR appreciated in early April on ceasefire news but gave up gains to end at 94.92/$ on continued tensions and stoppage of traffic in Strait of Hormuz.
• Liquidity conditions eased considerably at start of FY2027. However, liquidity conditions tightened a little on month end on GST outflows.
• RBI remained vigilant by providing liquidity through Variable Repo Rate (VRR) auction.
• Indian bond yields softened as RBI policy, though in pause mode, guided on easier rate policy in short term
• Further, US Iran ceasefire aided positive sentiment.
Corporate bonds remained rangebound with upward bias, as lower month end liquidity led to rise in short to medium term rates.
Outlook
• Despite ceasefire, the standoff in Strait of Hormuz, has led to continued pressure on oil prices.
• Higher oil prices are likely to impact inflation outlook and pressurize currency.
• USD/INR remains under pressure and is testing INR 95/$.
• US FED has been on hold. New FED Chair will lead the June FED meet. This transition is being keenly watched by markets.
• RBI MPC (Monetary Policy Committee) remains in pause mode with cautious outlook.
• Markets have started pricing rate hikes (in swap curve) and long-term continuation in the war may lead the RBI MPC to start assessing growth inflation outlook.
• In current FY liquidity has been easier. Further, RBI dividend of approx. 3 lacs crores (expected) is likely to be given to government at May end.
• Market sentiment is likely to remain negative in near term on higher government borrowings and monetary policy in a pause mode. External factors like higher oil and lower INR may impact rates negatively.
10Y yield may trade in 6.95%-7.15% range in the near term.
Source: RBI (Reserve Bank of India), MOSPI (Ministry of Statistics and Programme Implementation), PIB (Press Information Bureau), CMIE (Centre for Monitoring Indian Economy), NSDL (National Securities Depository Limited), S&P Global, Ministry of Commerce and Industry, Reuters, Bloomberg, Internal Research.
Note: Data updated as available in the beginning of the month.