Bonds in India Slide as RBI Raises Benchmark Rate, Rupee ClimbsBy and
Traders see bond losses capped as policy stance still neutral
There may not be a series of hikes: ICICI Securities’ Singh
Indian sovereign bonds slipped while the rupee climbed after the central bank raised its benchmark interest rate for the first time since 2014, but retained its neutral policy stance.
Only 14 of 44 economists surveyed by Bloomberg News had predicted the Reserve Bank of India’s decision to increase the repurchase rate by 25 basis points to 6.25 percent. Thirty expected no change. The central bank also said it will grant more entities the right to short-sell securities and allow more players to participate in the when-issued market, as part of measures to improve regulation and deepen financial markets.
Both sovereign bonds and the rupee turned volatile after the rate decision as traders read the fine print of the central bank’s statement. The yield on the benchmark 10-year notes jumped to as high as 7.93 percent, before paring its advance to 7.92 percent, up eight basis points for the day. The rupee was 0.3 percent stronger at 66.9250 per dollar, after swinging between gains and losses soon after the RBI’s announcement.
Wednesday’s move “should not impact bond yields much, as they already are at elevated levels, thanks to demand-supply issues and expectations for a tighter policy,” said Gopikrishnan MS, Mumbai-based head of FX, rates and credit trading for South Asia at Standard Chartered Plc.
A “dovish hike” is what Sonal Varma and Aurodeep Nandi, economists at Nomura Holdings Inc., termed the RBI’s move in a report. The decision to maintain a “neutral” stance suggests that the central bank does not want to signal that it is embarking on a tightening cycle and that it remains data dependent, they wrote.
Indian bonds have already been battered by rising crude oil prices, a widening fiscal deficit and tighter cash conditions. Overseas funds are selling domestic debt at a record pace, while local state-run banks -- the biggest buyers of sovereign bonds -- are shunning the securities as they face mounting losses on their investments. The benchmark 10-yield rose 43 basis points in the previous two months.
The central bank said it will also allow banks to spread losses incurred on their bond portfolios in the quarter ending June 30 equally over a period of four quarters.
“The bulk of the selloff may already be behind us,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “We suspect that Indian yields are likely to be rangebound for now.”
Outflows from Indian bonds have also contributed to making the rupee one of the worst performers in Asia this year. The RBI joins its peers in emerging markets from Argentina to Indonesia, who have raised rates to counter capital outflows and weaker currencies that threaten to drive up inflation.
“Crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook,” the central bank said in its policy statement, adding that “global financial market developments have emerged as another important source of uncertainty.”
India imports about three quarters of its oil and rising prices not only threaten to stoke inflation, but also worsen the nation’s trade deficit, putting more pressure on the currency.
A neutral stance “gives an impression that there may not be a series of hikes,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai. “They may come with a gap, that is, skipping consecutive policy meetings. My take is that a rate hike in August is not a done deal.”
— With assistance by Patricia Lui, and Nicholas Reynolds