The inflation shock adds to the question over whether the central bank would maintain policy accommodating to assist growth after the economy was hammered by a fatal Covid wave.
A rise in inflation readings this week has reignited debate among Indian sovereign bond dealers over how long the central bank can keep its dovish policy stance.
This week, the yield on India’s benchmark 10-year bond climbed to its highest level since April, while the borrowing cost on Treasury bills soared to its highest level in more than a year. This is a hint that some investors are betting on the Reserve Bank of India normalising policies after retail inflation recently surpassed the central bank’s comfort zone of 2 percent -6 percent.
The inflation surge raises questions about whether the central bank would maintain policy accommodating to boost growth after the economy was hammered by a fatal epidemic of Covid-19 infections. During a review earlier this month, RBI Governor Shaktikanta Das stated that “it is too early, it is too premature” to talk policy normalisation.
The inflation shock adds to the question over whether the central bank would maintain policy accommodating to assist growth after the economy was hammered by a fatal Covid wave.
“This inflation number may be viewed as an inflection moment for the bond market,” Pankaj Pathak, fund manager at Quantum Asset Management Co Pvt Ltd, said. “This has the potential to alter the path of monetary policy.”
Edelweiss Asset Management Ltd. CEO Radhika Gupta said she is sticking to cash on the shorter end of the yield curve rather than 1-2 year bonds, but she sees possibilities in the 5-10 year sections of the yield curve when Asia’s third-largest economy bottoms out this quarter.
Others, on the other hand, prefer to await further guidance from the central bank, as bonds continue to be supported by the RBI’s special operations, which include the government securities acquisition programme, which was extended by an additional 1.2 trillion rupees ($16.2 billion) earlier this month.
Sovereign bonds rose after dropping in the previous two sessions on Thursday, as the RBI purchased 345.8 billion rupees of central government bonds at a scheduled G-SAP auction, above the 300 billion rupees target. The 10-year yield fell to 6.02 percent after reaching a high of 6.07 percent on Wednesday, the highest level since April 30.
“For the time being, the market remains unclear about the durability of current inflation and its influence on the central bank’s policy stance,” Churchil Bhatt, executive vice-president of debt investments at Kotak Mahindra Life Insurance Ltd, said. “Participants will await RBI signals for more clarification and adjust accordingly,” he added.
