Debt Monthly View for March 2025

In March 2025, both U.S. Treasury and Indian Government Bond yields cooled off, influenced by a blend of global and domestic factors. President Trump’s aggressive tariff announcements spooked markets, driving investors to safer assets like U.S. Treasuries. At the same time, expectations of U.S. rate cuts and risk to growth outlook, fueled by weak economic data, added further pressure on Treasury yields.

On the domestic front, the RBI took proactive steps to improve liquidity through Open Market Operations (OMO) and currency swaps, leading to easing in the Indian Government Bond (IGB) yields.

In the money market, T-bill rates for the 3-month segment plunged post easing in liquidity conditions. Meanwhile, the 3-month AAA PSU CP/CD rates too moved in tandem to the 7.2%- 7.3% range against the 7.45% - 7.50% band on closing basis. The corporate bond yield curve continues to show strong demand in the 5–7-year segment.

Banking system liquidity eased in March 2025 despite seasonal pressures from advance tax, GST, excise collections, and currency demand. The RBI offset these challenges with significant OMO purchases, pushing core liquidity into surplus. The average daily deficit stood at Rs 1.6 trillion for the month. To facilitate smooth transmission of rate cuts, the RBI actively managed liquidity through a Rs 800 billion OMO purchase program for April 2025 (to be effective in four tranches of Rs 200 billion each), along with other measures like a $10 billion dollar-rupee swap auction. Since January 2025, total OMO purchases have reached Rs 3.30 trillion. As a result, core liquidity surged into a surplus of Rs 1.1 trillion by March 21, 2025.

Liquidity conditions are likely to improve in the coming months, as we expect the RBI to remain proactive in managing liquidity. Early April 2025 will likely see strong spending, following past trends, and will be further supported by a large RBI dividend of Rs 2.5-3 trillion expected in May 2025. This should ensure ample liquidity in the first half of the year. However, currency demand and seasonal changes in government balances could lead to tighter conditions in the second half.

The headline Consumer Price Index (CPI) inflation has significantly eased from 5.2% YoY in December 2024 to 3.61% YoY in February 2025. Food inflation has shown a notable decline, dropping from 7.69% YoY in December 2024 to 3.84% YoY in February 2025. In contrast, core inflation has slightly risen to 3.99% YoY, primarily driven by gold prices.

In our estimates, March 2025 inflation is trending toward the ~3.5% range. With ongoing food disinflation and stable global oil prices, we expect headline inflation to align with the RBI's forecast of 4% for Q4 FY26.

Globally, U.S. 10-year Treasury yields dropped from 4.21% to 3.94% following President Trump's announcement of aggressive global tariffs in early April 2025. The tariff news caused market disruption, prompting investors to flock to safe-haven assets like U.S. Treasuries, which led to a decline in yields. Additionally, expectations of rate cuts by the U.S. Federal Reserve, driven by weak manufacturing data and concerns about a potential slowdown in growth, further contributed to the fall in Treasury yields.

The Indian Rupee (INR) appreciated by 2.33% against the U.S. Dollar on a month-on-month basis, strengthening from Rs 87.5/USD in February 2025 to Rs 85.5/USD in March 2025. This appreciation was driven by a combination of factors, including a rise in foreign investments, a weaker U.S. dollar amid escalating trade tensions, effective liquidity management by the RBI, and the rupee’s resilience in a volatile global market.

Foreign investments in IGBs saw notable growth in March 2025 alone, with the Fully Accessible Route (FAR) segment receiving an influx of Rs 227 billion during the month alone.

In the medium term, global financial markets are expected to experience reduced volatility. The USD is likely to stabilize within its current range, potentially leading to a reversal of the safe-haven trade, which may result in increased capital flows into Emerging Markets (EMs).

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