Mumbai: The government kicked off a party in the bond market last week. And the central bank won’t want to spoil that.
While Governor Urjit Patel and his monetary policy committee have turned more hawkish on inflation recently, they are set to hold the benchmark interest rate at 6% on Thursday, according to all 26 economists in a Bloomberg survey. That should help extend a rally in the bond market, triggered last week when the government cut its first-half borrowing plans.
“The monetary policy will recognize the central government’s move, and probably give a thumbs-up to it," said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Co. “There will be a status quo."
Inflation aside, the Reserve Bank of India’s job is being complicated by mounting corporate and banking scandals, which analysts at Goldman Sachs Group Inc. say could peg back growth and cloud the investment climate if regulations are tightened. That could hit nascent demand in an economy where growth is forecast to slow to a four-year low in 2018.
While inflation has recently moderated, consumer prices may pick up because of rising fuel and vegetable prices. Economists in a Bloomberg survey see inflation accelerating to 5.3% in the quarter to June, well above the central bank’s medium-term target of 4% and the current 4.4%.
That’s underpinning expectations of a rate hike, with the swap market pricing in at least one 25 basis point hike in 2018.
Bond investors had endured the worst sell-off in two decades until the government last week surprised the market by saying it would raise only 48% of its planned annual borrowings in the first six months of the financial year starting 1 April, while also reducing its annual debt sale.
The benchmark 10-year bond yield ended 33 basis points lower in March, its first monthly drop since July with some expecting the central bank to support the current rally by further opening up India’s bond market to foreigners.
The RBI has already provided some relief by letting lenders spread their fiscal 2018 bond market losses over the next few quarters, a move which triggered a rally in bank stocks and the debt market on Tuesday.
The respite may prove temporary. Analysts expect the government to borrow more in the second half of the financial year, putting pressure on bond yields again. And since that’s also the period when companies tend to enter the market, the government’s activity could have a wider effect on growth.
“There is no doubt Indian companies will be crowded out," said Prabal Banerjee, group finance director at conglomerate Bajaj Group. Market borrowing costs will rise for companies by 25-50 basis points, he said.
For now, the RBI is set to retain a neutral stance, with an eye on incoming economic data.
“With growth trends improving and inflation surprising on the downside, we believe the balance of risks doesn’t require the MPC to change its stance," said Tanvee Gupta Jain, an economist at UBS Group AG. Bloomberg