Market Trends and Central Bank Dynamics : January 2025

 The  Treasury Sales Report for January 2025 provides a comprehensive overview of the financial landscape, highlighting critical developments in global markets, central bank policies, and domestic economic indicators.

Global Policy Shifts and Their Impacts

The markets are bracing for policy announcements from the newly instated US administration, which have already sparked volatility. While the Federal Reserve remains dovish, a rate cut in the immediate term seems unlikely, as confirmed by statements from Fed Governor Michelle Bowman. She emphasized the risks of premature rate cuts that could reignite inflationary pressures. Meanwhile, the European Central Bank (ECB) is also leaning towards caution, with rising inflation (2.7% in December 2024) decreasing the likelihood of near-term rate cuts.

Key Economic Indicators

1. US Inflation Trends: The US Consumer Price Index (CPI) for December 2024 rose by 0.22%, falling short of the expected 0.3%. This has eased bond yields, with the 10-year US Treasury yield dropping from 4.77% to 4.60%.
2. India's CPI and RBI Outlook: India's CPI for December 2024 came in slightly softer at 5.22%, below market expectations of 5.3%. With food inflation stabilizing and average inflation aligning with the Reserve Bank of India's (RBI) forecast, a 25-basis-point rate cut in February 2025 appears probable.
3. Eurozone Inflation: Rising inflationary pressures, from 2.5% in November to 2.7% in December 2024, reduce the likelihood of immediate rate cuts by the ECB.

Indian Market Highlights

• The USD/INR pair experienced subdued volatility, holding above the 86 mark despite foreign portfolio investment (FPI) outflows totaling $5.5 billion in January. The RBI's spot interventions led to a $9 billion weekly reduction in reserves, now standing at $626 billion.
• The flattening of the Indian Government Bond (IGB) curve highlights the tight liquidity conditions. The 10-year IGB yield briefly rose to 6.86% but consolidated at 6.75%, showing resilience against global yield fluctuations.

Sectoral and Asset Class Observations

• Oil Prices: Brent crude prices surged due to policy-driven supply constraints but stabilized at $75–80. Any reversal of offshore drilling bans could correct prices downward.
• Gold: A sharp rally in gold prices over the last fortnight underscores its appeal amidst macroeconomic uncertainties.
• Asian Currencies: Amid a strong dollar, most Asian currencies have remained range-bound, though the overall outlook remains weak due to ongoing USD strength and trade tariff concerns.

Forward Outlook

The markets are set to focus on key events such as the Bank of Japan’s rate decision, US PCE data, and the Federal Open Market Committee (FOMC) meeting at the end of January. Domestically, liquidity measures from the RBI, including potential CRR cuts, could offer much-needed relief.

Strategies for the Year

For investors navigating volatile forex markets, the report suggests range forwards to hedge against potential depreciation of the Indian rupee and continued weakness in the euro.

The Treasury Sales Report provides a timely and detailed analysis of the financial markets, helping investors and stakeholders make informed decisions amid evolving global and domestic economic conditions.