Top 10 factors affecting fixed income market
Fixed income instruments are a series of cash flows. They carry a fixed rate of return and maturity period. Fixed income securities are issued by both, government and private companies.
They can be short term or long term. Fixed income securities maturing before 365 days are known as money market securities. Long term fixed income securities have more than one year maturity.
The market is also divided on the basis of issuance- primary market and secondary market. The primary market is mainly active in terms of primary auction of government securities as well as issuances of PSU and private issuers. Therefore the primary markets are between issuers and investors while in the secondary markets the trading takes place between two investors.
The fixed income markets are majorly institutional in nature. Factors which affect the fixed income markets:Inflation: Inflation is a tendency for prices to rise continuously. The Central Bank has a tolerance limit for inflation.
If the inflation is outside the limits of tolerance, the Central Bank will act appropriately. If the inflation rates are higher than the tolerance limit then the Central Bank will hike the repo rates and vice versa. In India, the CPI inflation is tracked for this purpose.
The RBI has a tolerance band of 4% to 6% at present.Fiscal Deficit The Fiscal deficit as presented in the budget can be as per the FRBM Act (of 3%) or higher than the permitted. In the past 3 years, in India, we are higher than the permitted range on account of Covid spending. Due to the increase in fiscal deficit, the market borrowings also increased.
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