Bonds signal growing doubts on RBI’s easy policy stance
18 Jun 2021
By Subhadip Sircar
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, 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 growth after the economy was battered by a deadly wave of Covid-19 infections. RBI Governor Shaktikanta Das said “it’s too early, it’s too premature” to discuss policy normalization at a review earlier this month.
“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.
Sovereign bonds advanced Thursday after falling in the previous two sessions as the RBI bought 345.8 billion rupees of central government bonds at a scheduled G-SAP auction, more than the 300 billion rupees planned. The 10-year yield eased to 6.02% after rising 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.
–With assistance from Ronojoy Mazumdar.