A bond trader has to put big money to work even as he sits in the middle of a swirling flow of news, opinion and noise. Clear signals from credible institutions are thus keenly watched by traders, be it those emanating from government officials or information sources such as credit rating companies.
Bond traders in Mumbai are upset and confused in equal parts these days. The reason is simple: There are just too many official voices on the future direction of interest rates, the one parameter that affects bond prices most acutely. Over the past few months, policymakers and advisers who have no direct role in the making of monetary policy —C. Rangarajan, Kaushik Basu, Ashok Chawla and Montek Singh Ahluwalia, for example—have made statements that have moved bond markets.
They have often spoken at cross-purposes and led to unnecessary confusion in the bond market. The media does not play a very happy role either, with reporters hunting for news bites thrusting mikes and recording machines in the faces of various experts. The easiest question to ask: “What will happen to interest rates?”
Ideally, the central bank alone should make statements on current and future interest rates. We do not see finance ministries and treasuries publicly trying to second-guess central banks in the advanced economies. That rule is rarely observed in India.
Monetary policy was once conducted behind a shroud of mystery, but there has been a huge change in recent years as the role of the bond markets in transmitting policy signals into the real economy has grown. A lot of thought has thus been given to issues such as the optimal communication strategy of a central bank. There is a lot of debate about how much a central bank should reveal to the financial markets. But there is one area of broad agreement: Poorly planned and executed communication strategies are worse than no communication at all.
The discordant chorus that Indian bond traders hear is not a very serious problem right now, but could emerge as one as the corporate bond and derivative markets grow in the years ahead. It is best that it is left to the central bank to speak on interest rates.
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