Note to fixed income investors – Aug 2025
As expected, and highlighted in our June note, the MPC decided to keep the policy rate unchanged at 5.5%. Consequently, the standing deposit facility (SDF) rate stands adjusted at 5.25% and the marginal standing facility (MSF) rate and the Bank Rate at 5.75%. The MPC also retained stance at neutral.
On the liquidity front, post measures taken in June to provide durable liquidity, the banking system liquidity has been in surplus on an average of INR 3 lac crores. This has led to better monetary policy transmission as reflected in the lending and deposit rates.
With inflation for the current financial year expected to be much lower than the target and the policy rate much closer to the terminal rate; any further cut would purely be dependent on GDP growth showing negative surprise in the coming quarters amid global uncertainty.
Bond market gave a neutral reaction post the policy announcement as 10-year G-sec yield continues to trade in a tight range of 6.32%-6.38%. Lately, the short-term rates have moderated significantly amid rate cuts and surplus banking system liquidity. The term spread between 3-month T-bill and 10-year G-sec at ~100 bps has inched closer to the long-term average (LTA) term spread of ~120 bps. The 10-year G-sec, in the short term, is expected to continue to trade in a range bound manner in the absence of any adverse event.
Strategy for fixed income investors
- With the fall in G-sec yields over the last twenty months, our overweight call on duration has played out reasonably well. As communicated in our June note about change in the stance to neutral, we continue to expect limited capital upside from further fall in rates. Long-term yield could remain sensitive to the evolving growth-inflation dynamics.
- Corporate bond spreads remain muted with AAA spreads still lower than the LTA amid lack of supply in the bond market. In select instances, spreads for AA and A appear attractive after adjusting for risk. Investor with an appetite for credit risk could start evaluating select high yield strategies.
Disclaimer:
The information herein is published by AU Small Finance Bank or hereon mentioned as AU Bank. The trademarks, service marks & logos (intellectual properties) in this presentation are registered trademark property of AU Bank. No license is granted, by implication, estoppel or otherwise, to use the intellectual properties without the prior written consent of AU Bank. Any recommendation contained herein does not have any concern to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of the addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. AU Bank or any individual connected with AU Bank accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from the use of the information herein (including any error, omission, or misstatement herein, negligent or otherwise) or further communication thereof, even if the AU Bank or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any financial instruments or to provide any investment advice or services. AU Bank and its associates, their directors, officers, and/or employees may have positions or other interests in & may affect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. AU Bank acts as a distributor and has distribution license (ARN: 124591) to sell third party investment products like Mutual Funds. PMS, Alternates, broking or any other such arrangements are on referral basis. Any dispute with AU Bank shall have exclusive jurisdiction to the courts at Jaipur.
