Bonds in India Signal Doubts on RBI’s Easy Policy Stance
A spike in inflation reading has revived debate among Indian bond traders over how long the RBI could retain its dovish stance.
(Bloomberg) -- A spike in inflation reading this week has revived debate among sovereign bond traders in India over how long the central bank could retain its dovish policy stance.
The yield on India’s benchmark 10-year bonds surged to its highest since April, five-year swaps headed for the biggest weekly gain since February, while the borrowing cost on Treasury bills rose to the highest in more than a year this week. That’s a sign that some investors are bringing forward bets for policy normalization by the Reserve Bank of India after retail inflation recently crossed the central bank’s comfort zone of 2%-6%.
The inflation shock is adding to uncertainty on whether the central bank would stick to its pledge of keeping policy accommodative to support the economy. RBI Governor Shaktikanta Das said “it’s too early, it’s too premature” to discuss policy normalization at a review earlier this month, while Deputy Governor Michael Patra stressed that the bank sees the price surge as supply-side driven and lacking any persistent demand pull.
“This inflation reading can be treated as an inflection point for the bond market,” said Pankaj Pathak, fund manager at Quantum Asset Management Co Pvt Ltd. “This can change the course of the monetary policy direction.”
Some investors are already bracing for a shift.
The nine-month and 1-year swaps are now factoring in reverse repo hikes in October as against December earlier, said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership Ltd. IDFC Asset Management said it has raised cash holdings in its bond funds to 20%-35% as of June 14.
Radhika Gupta, chief executive officer at Edelweiss Asset Management Ltd. said she is sticking to cash on the shorter end instead of 1-2 year bonds while seeing opportunities in 5-10 year parts of the yield curve as she sees Asia’s third-largest economy bottoming out this quarter.
However, some others prefer to wait for further guidance from the central bank as bonds continue to remain supported by the RBI’s special operations including government securities acquisition program, which was extended by an additional 1.2 trillion rupees ($16.2 billion) earlier this month.
The 10-year sovereign bond yield was little changed at 6.02% on Friday after falling for the first time in three days in the previous session. That’s after RBI bought 345.8 billion rupees of central government bonds at a scheduled G-SAP auction on Thursday, more than the 300 billion rupees planned. The yield had risen to 6.07% on Wednesday, the highest since April 30.
“Market, for now, is undecided on sustainability of current inflation and its impact on the central bank’s policy stance,” said Churchil Bhatt, executive vice-president of debt investments at Kotak Mahindra Life Insurance Ltd. “Participants will look forward to RBI signals for further clarity and adapt accordingly,” he said.
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