Modi Choice of Owlish Patel Calms Investors’ Inflation Fears
(Bloomberg) -- Prime Minister Narendra Modi just sent a strong message to foreign bond investors without uttering a word.
His administration’s choice of Deputy Governor Urjit Patel to take over from Raghuram Rajan in September suggests a sustained focus on curbing living costs, after the Oxford-educated Patel helped the governor implement an inflation target. HSBC Holdings Plc said its bullish view on India is reinforced by the appointment, which Aberdeen Asset Management Plc said lays to rest uncertainty about policy continuity. PineBridge Investments said it will help draw money to the Asian nation.
“Patel will be tough on inflation and this will be good for bond markets and deliver economic benefits in the long run,” said Leong Lin Jing, Singapore-based investment manager at Aberdeen Asset. “Patel’s appointment is confirmation that Prime Minister Narendra Modi is committed to reforms.”
While India’s markets initially priced in lower expectations for RBI interest-rate cuts, bonds stabilized Tuesday and the rupee rallied as concern alleviated that policy makers would trade financial stability for short-term stimulus. Rajan’s decision to return to academia came as a Modi ally attacked him for keeping interest rates too high. Inflation climbed to a 23-month high in July and, while it is below levels that helped topple the last government, it remains a concern for a nation that the World Bank estimates is home to the world’s largest number of poor people.
Patel burnished his inflation-fighting credentials after a panel he headed in 2014 suggested a consumer-price goal and the formation of an independent monetary policy committee to decide interest rates. Modi’s government this month agreed to a target of four percent through 2021, while allowing fluctuations in a 2 percent to 6 percent band, while the policy panel is expected to be formed this year.
During an interaction with reporters in 2014, he said the central bank was neither a hawk or a dove, but an owl. “An owl is traditionally a symbol of wisdom, so we are neither doves nor hawks but owls, and, we are vigilant when others are resting.”
Vigilance will now be warranted after inflation climbed for a fourth month to 6.07 percent in July. The CPI data halted a sovereign debt rally that had driven the 10-year yield to the lowest since Sept. 2009 on Aug. 11. It fell 3 basis points to 7.13 percent on Wednesday. A gauge of 10-day historical volatility in Indian notes due in a decade fell to 3.40 percent from 3.77 percent Tuesday.
HSBC predicts the yield will drop to 6.5 percent as the central bank enforces inflation targeting and purchases bonds worth 1.8 trillion rupees ($27 billion) in the year through March 2017.
“Enhancing the institutional framework to support the RBI’s efforts to meet their main goal of stable inflation will be high on the agenda to maintain a positive outlook for foreign investors including ourselves,” said Anders Faergemann, a London-based senior sovereign portfolio manager at PineBridge, which manages assets worth $80.7 billion.
Modi’s pick for governor comes ahead of elections due next year in the prime minister’s home state of Gujarat and the most-populous state of Uttar Pradesh. Despite this, Modi resisted the temptation to appoint someone who will promote short-term growth at the expense of long-term development, Aberdeen said.
Stable inflation would add luster to Indian yields that are already the highest among major Asian markets despite the 10-year rate dropping 29 basis points in July and 60 basis points this year. Similar-maturity Indonesian securities yield 7 percent, while China’s offer 2.7 percent and the U.S.’s 1.55 percent.
“Inflation is the biggest enemy of bond markets and to that extent this appointment indicates commitment of policy makers toward curbing it and will be viewed very positively by foreign investors,” said Himanshu Malik, a strategist at HSBC Holdings Plc in Hong Kong. “Dr Patel’s appointment further strengthens our bullish view on Indian bonds.”