You are using an older browser version. Please use a supported version for the best MSN experience.

Bond bulls say cheers again as RBI seen abandoning hawkish tone

LiveMint logoLiveMint 02-06-2017 Kartik Goyal

Mumbai: Just as Indian bond bulls were about to leave the party, it looks like they may be staying a bit longer as record-low inflation fuels speculation the central bank could ditch its hawkish tone next week.

Bullish sentiment is resurfacing in the debt market after the economy grew at its slowest pace in two years and price pressures eased to an all-time low of 2.99%.

Food prices are set to decline even further on expectations for a normal monsoon season and the start of a new and lower goods-and-services tax on numerous edible products.

Debt traders were caught off-guard in April when minutes from the Reserve Bank of India’s (RBI) policy meeting took on an unexpectedly hawkish slant, flagging concerns about inflation while one panel member even called for a pre-emptive rate increase.

RBI Governor Urjit Patel reinforced the bias a week later, saying a phase of rising interest rates is setting in for emerging markets.

“Sentiment is becoming more sanguine now after it turned bearish following the RBI minutes,” said Vijay Sharma, executive vice-president for fixed income in New Delhi at PNB Gilts Ltd. “With the new dynamics of inflation emerging, including the GST and expectation of a normal monsoon, the view taking shape in the markets is that the RBI doesn’t have a case to remain hawkish.’’

The yield on the newly-issued 10-year benchmark government bonds may fall to around 6.50% if the RBI acknowledges faster-than-expected disinflation and reveals a benign CPI outlook, said Sharma.

The 10-year yield was at 6.65% Thursday and a Bloomberg survey predicted the rate may climb to 6.78% by end of June.

Consumer price inflation (CPI) may fall 2% by fiscal year-end due to improved compliance after the GST, Revenue Secretary Hasmukh Adhia said in an interview with the Business Standard newspaper last week. The GST may shave 10 to 50 basis points off India’s CPI, according to HSBC Holdings Plc.

“The market is expecting a reset in RBI’s monetary policy tone going forward,” said Rajeev Radhakrishnan, Mumbai-based head of fixed income at SBI Funds Management Pvt., a unit of India’s largest lender. Softer inflation, forecast of normal monsoon rains, ample banking liquidity and positive foreign inflows are giving traders reasons to expect the RBI to tone down its hawkish bias and possibly even cut policy rate one more time, he said.

The 10-year benchmark yield has declined by eight basis points to 6.65% since the release of the record-low inflation data. The yield jumped to an eight-month high of 6.99% in May.

Optimism in the bond market is shared by swap traders. One-year interest-rate swaps fell to 6.39% on 1 June, lowest since 27 March, suggesting investors are starting to price in a less-hawkish RBI.

Swaps extended their drop after India’s economic growth slowed to 6.1% last quarter, adding to speculation the RBI may dial down its hawkish rhetoric.

“When the writing on the wall is clear, that inflation is not going to be the problem they had anticipated, or the anticipated risk from the GST is not turning out to be a risk, I don’t think they have a room to be hawkish,’’ said Sharma of PNB Gilts. Bloomberg

More From LiveMint

image beaconimage beaconimage beacon