Bond losses seen in India as dissent breaks out at RBI
13 Aug 2021
By Subhadip Sircar and Ronojoy Mazumdar
India’s bond yields will rise by year-end as disagreement among central bank’s rate-setting panel members indicates they are moving toward a more hawkish stance, a Bloomberg survey has found.
The benchmark 10-year yield will climb to 6.40% by December, while the five-year yield will increase to 5.90%, according to the median estimate in the survey of 15 traders, fund managers and economists conducted this week. The 10-year yield closed at 6.23% on Thursday, and the five-year at 5.74%.
Bearishness toward the country’s sovereign debt increased after one of the six Reserve Bank of India monetary policy panel members voted against the lower-for-longer stance at last week’s policy meeting. That was a departure from previous gatherings this year when they had been unanimous on the need to support growth amid the coronavirus.
“What caused the unease for the market was that the vote for the accommodative stance was 5-1,” said Badrish Kulhalli, head of fixed income at HDFC Life Insurance Ltd. in Mumbai. “The expectation is that, once the minutes are out, they may show a greater amount of debate about the time period for maintaining the accommodative stance.”
Two other bond negatives also came out of the meeting. The RBI raised its average inflation forecast for the current fiscal year to 5.7% from 5.1%, and said it would increase the amount of money it drains from the banking system via its variable rate reverse repurchase agreements.
The dissent from monetary policy committee member Jayanth Rama Varma came after India’s annual inflation rate topped 6% in both May and June, putting it back above the upper end of the RBI’s target band. While this wasn’t the first time Varma dissented, it added to a slew of negatives for the nation’s debt including rising supply, stubborn inflation and speculation the global recovery is gathering pace.
The Bloomberg survey also found a wide divergence of views about when the RBI will start raising its key reverse repurchase rate. Six of the analysts forecast the first move will take place in December, while two said February, six April and one in June.
Swap markets are currently predicting the initial hike will take place in October, while 40 basis points are priced in by December, according to ICICI Securities Primary Dealership Ltd.
“The RBI could straddle this divide between market expectations and its own patient approach by guiding the market for a December hike using growth and vaccination goalposts,” ICICI economists including A. Prasanna in Mumbai wrote in a research note. “Such a contingent guidance in the October review would plausibly prevent premature tightening of financial conditions.”
Another crucial determinant for India’s bond yields is how aggressive the RBI will be in trying to prevent them from rising. The central bank is scheduled to buy 1.2 trillion rupees ($16.2 billion) of bonds this quarter under its government securities acquisition programme.
“The way the market moves will depend on supply and how much the RBI buys in its so-called GSAP purchases,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank Ltd. in Mumbai. “It’s pure supply and demand driven right now. The market is not in a bearish mode, but completely in a holding pattern.”
Here are the results of the survey: