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Debt markets rally on signals of dovish tilt from RBI’s MPC

Debt markets rally on signals of dovish tilt from RBI’s MPC

03 Sep 2021

NEW DELHI: Traditionally, September marks the beginning of a long ‘festival season’ in India and this year, it seems that the sovereign bond market has joined the party.

On the face of things, festivities would seem incongruous as India’s economy is still struggling from the ravages of the Covid-19 pandemic. But, when it comes to the Indian bond market, more often than not, bad news is good news (an irony which is not lost on traders).

Yield on the 10-year benchmark 6.10%, 2031 government bond has dropped 3 basis points since Thursday as the market has digested some good news.

The latest driver of the rally in the bond market is talks of a rather dovish tilt taken by some members of the RBI’s rate-setting panel.

Given the fact that India’s GDP growth in April-June—while registering a record high — failed to live up to expectations, it is not surprising that members of the Monetary Policy Committee would reiterate that growth remains on the pedestal even when inflation has up above RBI’s medium-term target of 4%.

ETMarkets.com got a glimpse of what some members of the rate-setting panel seem to be thinking:
Latest Covid numbers are a concern, but they are particularly linked to a single southern state. However, given the linkages of the state with non-resident Indians, the threat could be greater than estimated at the moment.

Members also raised concerns about the onset of the festival season. After last year’s subdued celebrations, it is likely that all parties (ranging from governments, organisers to the common person) would seek an opportunity to let their hair down. Lest one forget, the festive season is also a huge contributor to income (both personal and government).

Another point raised: While RBI is confident of its growth estimate of 9.5% for FY22, the April-June GDP growth print of 20.1% holds no significance as the base effect was overtly strong.

On the topic of growth, ETMarkets.com presents the key takeaways:

  • Both GDP and GVA levels in the first quarter are lower than 2019 levels.
  • In a flexible inflation targeting framework, growth should take priority when faced with an event like COVID.
  • Industries like trade, hospitality, communication and construction are still in contraction.


  • Members maintained that the MPC is data dependant, forward guidance has been given as it reduces uncertainty. Moreover, there is a degree of data-dependance on forward guidance.
  • Expect no knee-jerk actions from MPC
  • Normalisation can be expected once there is surety on growth; no such surety so far.