That the bond market is cautious about the hopes of a rate cut by the Reserve Bank of India (RBI) at its monetary policy meeting on Tuesday is evident from a bout of profit booking in government bonds last week, sending the yield on the 10-year government security to 5.73%, up from the previous week’s 5.53%.
The 10-year yield has hardened considerably from a low of 4.86% seen on 5 January, after the government said it intends to borrow more.
On the Bombay Stock Exchange (BSE), the Bankex— index of banking stocks—has fallen 25.7% from this year’s peak reached on 7 January, much more than the decline of 17.1% in BSE’s benchmark index, the Sensex, from this month’s peak.
While the hopes generated by the Obama bear market rally have petered out rather soon, rate-sensitive banking stocks have felt the brunt of the recent fall, again indicating that hopes from RBI meeting are not high.
Globally, the initial optimism at the beginning of the year has faded abruptly. The MSCI World index is down 8.24% (in local currency terms till 23 January) this year, MSCI India is down 10% and MSCI China down 13.2%.
Fund-tracking research house EPFR Global says that emerging market equity funds posted outflows during the third week of this month, with Asia ex-Japan equity funds taking the biggest hit. The JPMorgan EMBI+ index, which measures yield spreads between emerging market bonds and US treasury and is a key measure of risk aversion, was at 667 basis points last Friday—the spread had fallen to 630 on 6 January.
Gold rallied above $900 (Rs44,280) an ounce last Friday, its highest price since early October, another indication of a lack of confidence.
On the economy front, the International Monetary Fund has talked of lowering global growth estimates yet again. China’s fourth quarter gross domestic product (GDP) growth fell to 6.8%, from 9% in the September quarter.
Back home, while the Prime Minister’s economic advisory council has said GDP growth this fiscal will be 7.1%, the markets don’t believe them. Selling by FIIs has resumed, with $572 million pulled out last week.
Simply put, the current economic and market environment is bleak and balance sheet risk for the corporate sector has increased substantially. What should RBI do in the circumstances?
Manish Chokhani, director at Enam Securities Pvt. Ltd, has pointed out that with savings coming down on the one hand and with the government spending more on the other, there will be pressure on interest rates to go up.
In the circumstances, while it’s true that expectations of a rate cut are low since RBI reduced its policy rate on 2 January, more rate cuts are needed not only to shore up confidence, but also to neutralize the impact on interest rates of larger government borrowing.
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