Expectations from fixed income market in 2021: What experts say

Key risks for the government will be to steer through any financial sector stress, reviving the weak investment cycle and any adverse issues with global liquidity.

Two issues will shape India’s macro-economic situation in CY2021; easy money policies in developed markets and rollout/mass availability of Covid vaccines. Easier global monetary policies will aid risk-on flows, while vaccine rollouts will aid risk-on flows, while vaccine rollouts will aid faster normalisation of growth.

However, risks of higher commodity prices (especially that of crude oil) could weigh on India’s inflation and external sector balance. Expect a cyclical recovery in growth and a gradual adjustment in interest rates. Beyond FY2022E, growth will likely moderate, as interest rates move higher, global tailwinds fade and the fiscal stress continues even as benefits from production-liked incentives in manufacturing and labour reforms would start yielding early benefits.

Most of RBI’s liquidity injection (which has driven market interest rates lower) has been through forex accretion in FY2021 and is likely to continue. With inflation expected to settle above 4 per cent, expect RBI to begin liquidity normalisation from FY2022 onwards, even while keeping the repo rate steady.

Accordingly, market rates are expected to harden across the curve in FY2022, with the shorter end of the curve underperforming the far end.

The forex market outlook will broadly be determined by a secular weakness in the dollar, sustenance of easy monetary policies in developed markets and the pace of vaccine rollout. While these are favourable for risk-on flows across emerging markets, the consequent growth recovery will provide a fillip to commodity prices, capping some of the gains in the rupee.

Meanwhile, rupee moves are likely to remain a function of RBI’s forex intervention. Thus, expect the rupee to trade with an appreciating bias through H1FY22 (72-75), with risks emanating in the latter part of the year (74-77), with a sharp depreciation bias stemming from the enormous forex accretion.