While the markets had great respect for Raghuram Rajan as a governor, bonds have rallied on the expectation that the incoming governor will be softer on inflation, leaving more room for rate cuts in the near term, says a trader. Photo: Reuters
While the markets had great respect for Raghuram Rajan as a governor, bonds have rallied on the expectation that the incoming governor will be softer on inflation, leaving more room for rate cuts in the near term, says a trader. Photo: Reuters

Raghuram Rajan’s potenial successor at RBI cheered by stocks, bonds

Bond yields fell and bank stocks surge ahead of an anticipated announcement of the new Reserve Bank of India governor to replace Raghuram Rajan

Mumbai: Bond yields fell and bank stocks surged on Tuesday ahead of an anticipated announcement of the new Reserve Bank of India (RBI) governor.

Earlier in the day, CNBC TV-18 reported that the decision on a replacement for Raghuram Rajan will be taken shortly.

According to news reports on Monday, Arvind Panagariya, the current vice chairman of the government’s NITI Aayog has emerged as a possible candidate for the post of governor.

In anticipation of an easier monetary policy under Panagariya, the benchmark 10-year bond yield fell six basis points on Tuesday, its steepest fall since 29 February.

Panagariya is widely seen as dovish on inflation, which has led the market to believe that there could be scope to steeper rate cuts if he takes over. In an interview in January, Panagariya said that the RBI’s inflation target of 4% (+/-2%) target should be reviewed.

The 10-year bond yield closed at 7.337%—a level last seen on 19 June 2013, compared with Monday’s close of 7.385%. Long-term yields have fallen to their lowest since 19 June 2013. Since Rajan announced his exit on 18 June, the benchmark 10-year bond yield has fallen by 17 basis points and is currently trading at 7.33%—the lowest since 19 June 2013. One basis point is one-hundredth of a percentage point.

“While the markets had great respect for Raghuram Rajan as a governor, bonds have rallied on the expectation that the incoming governor will be softer on inflation, leaving more room for rate cuts in the near term," said a bond market trader on the condition on anonymity.

Also Read: Who are Raghuram Rajan’s potential successors as RBI governor?

To be sure, a change in governor is not the only reason for bond yields to ease. A drop in global yields following Britain’s referendum vote to exit the European Union and the RBI’s cash infusions, which have helped do away with a liquidity deficit, have also helped.

“The Brexit outcome has opened a Pandora’s box of sliding global yields—reflecting fears of intrinsic global weakness and consequent new round of policy accommodation. The expectation of policy responses has possibly contained global risk aversion, keeping EM (emerging market) assets still lucrative. India bonds have followed global suit, with local factors offering a further boost. We expect the 10-year yield to ease to 7.15% by end-December, helped by continued RBI accommodation amid more dovish DM policy stance and comfortable domestic growth-inflation mix," Kotak Institutional Equities wrote in a note on Tuesday.

A drop in bond yields is positive for bank stocks as it allows lenders to lock-in treasury gains on their bond investment portfolios. As such, bank stocks have also rallied. Investors are also watching to see the stance that the incoming governor will take on the clean-up of bank balance sheets which Rajan initiated last year.

In trading on Tuesday, the Nifty Bank index rose 1.5% to 18,667.60 points and the Nifty PSU Bank index 0.35% to 2,886.70 points. The Sensex gained 0.66% to 27,808.14 points and the Nifty rose 0.63% to 8,521.05 points.

ICICI Bank Ltd rose 4.7%, Axis Bank 3%, Union Bank of India rose 2%, Federal Bank 1.7%, DCB Bank 1.2%, Yes Bank 1%, Indian Bank 0.92%, State Bank of India 0.8%, City Union Bank 0.8% and Canara Bank 0.8%.

RBI deputy governor Urjit Patel and two former RBI deputy governors—Subir Gokarn and Rakesh Mohan—besides Arvind Subramanian, the current chief economic adviser, and Shaktikanta Das, finance secretary, are also seen as likely candidates for the post of RBI governor.

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