DEBT OUTLOOK November 2023

On central government fiscal data for April-September, net tax revenue growth was up 14.7% y/y
as corporate and income taxes picked up in September. Total expenditure was up 16.2%y/y, with
both revenue and capital expenditure stronger. Fiscal deficit so far is 39.3% of the budget estimate
vs. 35.8% during the same period last year (latter as a% of provisional actuals). In terms of financing
the fiscal deficit, small savings collection was stronger by around Rs. 60,000cr from the same period
of last year. In October, GST collection picked up to Rs. 1.72 lakh crore and 13% y/y.
Consumer Price Index (CPI) after the spike in India’s Consumer Price Index (CPI) inflation to 7.4%
y/y in July, mainly driven by the surge in tomato prices, it eased to 6.8% in August and 5% in
September. Overall food and beverages price momentum fell further by 1.8% m/m in September
as prices of tomatoes corrected sharply. Prices of oils & fats and fruits also fell bit that of cereals,
pulses, meat & fish, egg, sugar and spices increased. Core inflation (CPI excluding food and
beverages, fuel and light), which averaged 6.1% in FY23, moderated in recent months and eased
further to 4.5% y/y in September, also due to base effects. Real time prices of onions have risen
sharply while that of cereals and pulses have moved up further. As per the first advance estimates
of production of major Kharif season crops for 2023-24 (subject to subsequent revisions), total
pulses production is estimated to be lower than last year while total rice production is estimated to
be higher than last year and average levels. Government has been taking various supply side
measures (procurement, open market sales, international trade, price rise mitigation, etc.) which
also impact agriculture production and food inflation.
Industrial production (IP) growth was 10.3%y/y in August after 6% in July. On a seasonally
adjusted month-on-month basis, it was +1.4% in August after -1.5% in July. By category, output
momentum picked up strongly for primary, capital, intermediate, infrastructure & construction and
consumer durable goods (these had contracted in July) but turned negative for consumer non-
durable goods. Infrastructure Industries output (40% weight in IP) fell 2.2% m/m (seasonally
adjusted) in September, as output in cement, natural gas, electricity and petroleum refinery
products fell. However, fertilizer output increased.
Bank credit outstanding as on 20th October was 19.7% y/y, including the impact of the merger of
a non-bank with a bank from 01 July 2023. Excluding this, credit growth had been moderating from
late October 2022. Latest bank deposit growth is at 13.4%. Credit flow in FY23 was much higher
than in the previous two financial years with strong flows to personal loans (38% of total flow) and
services (33% of total flow). Credit flow so far in FY24 (Apr-September) has also been higher
towards personal loans and services.
Merchandise trade deficit for September decreased to USD 19.4bn, after it had increased to USD
21.7bn in August. In September, oil trade deficit increased but gold imports moderated and, more
importantly, non-oil-non-gold imports fell strongly by USD 4.8bn. Further, services trade surplus
surprised to the upside from late 2022 with an average monthly surplus of USD 13.4bn in H2 FY23
vs. USD 10.9bn in H1 FY23. This was at USD 14.5bn in September, after USD 13.6bn in August, and
averaged USD 11.7bn in Q1 FY24 and USD 13.5bn in Q2 FY24.
Among higher-frequency variables, number of two-wheelers registered improved since end of
August and picked up more recently due to the festive season. Energy consumption levels have
averaged 15% y/y during the week ending 08 November 2023. Monthly number of GST e-way bills
was stronger at 10cr units in October (after 9.2cr units in September) and has averaged 9.1cr in the
September quarter and 8.6cr in the June quarter.
US headline CPI was at 3.7% y/y in August and September, with base effects also in play. In
September, price momentum in energy goods increased further and that in rent of shelter was quite
stronger but that in used vehicles fell further. Core CPI was at 4.1% in September after 4.3% in
August. Sequential momentum in headline CPI moderated, that in core CPI was mildly higher and
that in non-housing-core-services stayed higher. US non-farm payroll addition in October (150,000
persons) was below expectation and growth in average hourly earnings moderated to 0.2% m/m
from 0.3% in September. The unemployment rate inched up while the labour force participation
moved down. Non-farm job openings as per the Job Openings and Labor Turnover Survey (JOLTS)
inched up very mildly after picking up in August for the first time in three months. The job-opening-
to-hires ratio for the non-farm sector is now 1.63, off the peak of 1.83 in March 2022 but higher
than the pre-pandemic average of 1.18 in Jan-Feb 2020.
The FOMC (Federal Open Market Committee), left its policy rate unchanged at its meeting this
month (after doing the same in September) at 5.25-5.50%. The last hike was in July, after pausing
in June and rate hikes in every meeting from March 2022 to May 2023. It said the risks of under-
doing vs. over-doing (on policy rate hikes) are more two-sided now. It also said tighter financial and
credit conditions are likely to weigh on economic activity. It acknowledged the recent significant
tightening in financial conditions, driven by higher longer-term bond yields and other factors, and
said persistent change in financial conditions can have implications for the path of monetary policy.
Source: CEIC, PIB, US Federal Reserve, Bandhan MF Research.

Date: As on latest data available.

Outlook
US macro policy stands out in terms of the fiscal deficit reset that it has underwent. This has meant
more economic imbalances, a stronger rate hike cycle, and prospects of higher for longer rates.
However, dollar index seems to have already peaked thereby limiting the extent to which US is
exporting tighter financial conditions. Meanwhile, many emerging markets have better
macroeconomic buffers. Thus, yield differential narrowing is grounded in sound macro-economics
and needn’t be a cause of worry (within limits). Nevertheless, there are signs that US is coming into
better balance and the Fed has acknowledged the recent rise in bond yields. This has led to some
cooling off of yields. Meanwhile, other developed markets like Europe are showing more concrete
signs of economic momentum loss. China momentum may be turning but will likely still be weak
given limited degrees of freedom with policy.
India’ macros are sound. Of particular note are well behaved services inflation (unlike the West) and
buffers on current account that have been built owing to rise in services trade surplus. Fiscal
dynamics are looking much better after a sharp pick up in tax revenues recently. Current account
trends have to be watched closely. If sustained this is positive for interest rates over the medium
term.
India’s yield curve is positive sloping and has enough term spread cushion when policy rates are at
or close to peak. RBI’s focus is on liquidity management thereby forcing more transmission from
lenders.
Government bond demand – supply dynamics look favorable going forward even accounting for
some near term OMO sales from RBI (which are yet to materialize via announced auctions even as
secondary market sales have continued). With international interest in our bonds poised to rise and
sound local macros we strongly believe it is now time to be overweight quality fixed income. Credit
spreads are probably bottoming out for the cycle and we expect quality to outperform credit on a
risk adjusted basis over the next foreseeable horizon. Satellite allocations to long / active bond
funds also make sense but with a medium-term investment horizon.

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