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State Bank of India to abandon bullish bond bias

LiveMint logoLiveMint 30-04-2017 Bloomberg

State Bank of India (SBI), the country’s largest bank is turning more cautious on its bond investments, surprised by the hawkish minutes of the Reserve Bank of India’s (RBI) latest policy meeting.

“I was neutral with a bullish bias earlier, now I am just neutral,” said C. Venkat Nageswar, Mumbai-based deputy managing director and treasury head, SBI, in an interview. The minutes “were more hawkish than expected” with the stance taken by a couple of members being “a surprise for us,” he added. The yield on India’s benchmark 10-year sovereign bonds jumped to 6.95% on 26 April, its highest close since September. That’s after minutes of the RBI’s 5-6 April meeting released last week showed that policymakers expressed concerns about inflationary pressures, with one of the six panel members even suggesting a pre-emptive increase in the key repurchase rates. Nageswar predicts the 10-year yield to range between 6.80% and 7.10% till September. That compares with a band of 6.70% to 6.95%, with a bias toward 6.70%, before the release of the minutes. The yield, which was at 6.94% in Mumbai on 27 April, will drop to 6.85% by September, according to the median estimate of economists surveyed by Bloomberg News between 21 April and 26 April.

“There is reason for us to be more careful on yields,” Nageswar said, adding that he is now a little less confident that the RBI won’t increase rates by December. “The strategy is premised on bond markets not giving easy profits from falling yields. We would still be looking at the shorter end, but now we would need to be more opportunistic in terms of timing the purchases.”

The RBI panel unexpectedly raised the reverse repurchase (repo) rate earlier this month while keeping the main repo rate unchanged, effectively tightening policy by making overnight borrowings expensive. That followed February’s surprising change in the authority’s stance from accommodative to neutral, as it signalled an end to the easing cycle that began in early 2015.

The RBI’s steps have come as authorities seek to rein in liquidity after the government’s November recall of high-value currency notes flooded the banking system with cash. The surplus funds risk intensifying price pressures and imperiling the RBI’s 4% target set for the medium term. The next rate decision is on 7 June.

Nageswar said he expects the benign cash conditions and demand from yield-hungry foreign investors to provide support to bonds. Overseas funds boosted holdings of local government and corporate debt by Rs36,000 crore between January and March, helping the rupee surge 4.7%, to cap its biggest first-quarter gain since 1975.

“I haven’t turned bearish,” Nageswar said. “There is additional demand from banks, as well as from foreign investors, for whom a strong and stable rupee makes Indian debt very attractive at these levels.”

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