Rajan Fate Joined by Inflation in Wall of Worry for Indian Bonds

  • Change in RBI attitude created ‘uneasy sentiment,’ Mirae says
  • Rajan notes ‘surprise’ CPI acceleration, uncertain trajectory

Reserve Bank of India Governor Raghuram Rajan could do little to allay bond investors’ concern over inflation on Tuesday. Both his future and the fate of monsoon rains lie beyond his control.

While leaving benchmark borrowing costs at a five-year low, Rajan said the “surprise” acceleration in consumer-price gains to a three-month high in April made “the future trajectory of inflation somewhat more uncertain.” A strong monsoon, astute food management and expanded supply of goods and services were needed to offset upward inflationary pressures, he said.

“The change of the RBI’s attitude toward inflation created a bit of uneasy sentiment among market participants,” said Kim Jinha, Seoul-based head of global fixed income at Mirae Asset Global Investments Co., which manages $83 billion worldwide. “The increased uncertainty on the RBI’s inflation outlook made India’s monetary policy path look less clear.”

A looming pay rise for government employees and rising oil costs pose risks to Rajan’s inflation target of 5 percent by March 2017. Foreign holdings of local government and corporate debt have slumped by 69.4 billion rupees ($1 billion) since the start of May, amid speculation the governor won’t get his tenure extended in September. Rajan on Tuesday urged patience regarding his future.

“In all such cases the decision is reached after discussions between the government and the incumbent," Rajan told reporters in Mumbai. “I’m sure you will know when there is news.”

Bond Returns

The government is likely to offer an extension to Rajan, ET Now television channel reported in a Twitter post on Wednesday, citing government sources it didn’t identify. In an interview broadcast on the CNBC Awaaz channel later in the day, Rajan said he can’t confirm or deny the extension speculations. The RBI will cut rates further when there is room, he added.

A three-month rally in India’s 10-year government bonds ended in May as global oil costs surged, speculation around Rajan’s future reached a fever pitch and investors priced in expectations of higher U.S. interest rates in coming months. The yield on the notes maturing in January 2026 has climbed five basis points since end-April to 7.49 percent.

Returns on Indian sovereign bonds this year, at 5 percent, lag those in Indonesia, the Philippines and Thailand, after being Asia’s top performers in the last two years, indexes compiled by Bloomberg show. The rupee is the region’s worst-performing currency in 2016 after the Chinese yuan, having lost 0.9 percent to 66.7250 a dollar. Its 1.4 percent slide in May was the biggest since January.

Consumer prices rose 5.39 percent in April from a year earlier. The consumer food-price index climbed 6.32 percent, led by a 34 percent surge in pulses, after a 5.21 gain in March. The prediction for above-normal June-September monsoon rains for the first time since 2013 is seen boosting prospects of farm output in Asia’s third-largest economy, after production of crops including rice, corn, sugar cane and oil-seed all fell last season, increasing the cost of food.

The seasonal rains, which water about half the crop land in the country, reached the southern state of Kerala on Wednesday. The normal onset date for the showers is June 1 and the India Meteorological Department had said earlier that they’d probably cover Kerala by June 9. Agriculture accounts for roughly 18 percent of India’s gross domestic product and the delayed arrival this year put some farmers on edge.

“The biggest factor that bond markets will be watching for inflation is how the monsoon pans out as that will decide the future course of monetary actions,’’ said Gopikrishnan MS, Mumbai-based head of foreign exchange, rates and credit for South Asia at Standard Chartered Plc. “Rajan’s extension, if it doesn’t come through, will have a negative impact in the near term. We may see foreign investors pulling out money of the country. We could see outflows of $5 to $10 billion.’’

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