At one point of trading bonds erased substantial gains after the Reserve Bank of India kept monetary policy rates and stances unchanged belying expectations of a token increase in the reverse repo rate, the rate it pays banks for parking excess funds.
“Market sentiment is weak amid a slew of uncertainties emanating from geopolitical and macro factors,” said Siddharth Bachhawat, head – trading, Barclays Bank India. “Even though rates rallied post the RBI policy, risk appetite remains subdued. Rising crude is worsening sentiment further.”
Benchmark government bond yields closed a tad lower at 6.74 percent. The yields spiked up to 11 basis points during the week. The highest bond yield before the latest policy review meeting was noted on Feb 2 at 6.92 percent.
While investors cheered the RBI breaking ranks with global central banks to keep a dovish stance, fears of the central bank falling behind the curve is intensifying. The Bank of England has raised rates twice and the Federal Reserve may do so at least five times this year is what economists are forecasting. But the RBI is on a different path.
“On inflation, we have done our homework… all uncomfortable questions and risks have been duly assessed and we have arrived on these (inflation) numbers,” Governor Shaktikanta Das told reporters after the last MPC meeting. “As far as what other central banks are doing, the character of inflation is different in those economies as compared with India.”
Inflation is forecast to trend down to 4.5% next year from near 6% in the current quarter. But the crude oil price movement close to $100 a barrel after the Ukraine crisis is making investors jittery that the forecasts may have to be revised upwards.
“Rising crude oil prices coupled with an unpredictable rate trajectory is weighing on the local govt bond market. The recent geo-political tensions have also added to the uncertainty,” said Piyush Wadhawa, head of treasury at IDFC Bank. “This is reflected in sharp fall in daily volumes which have less than halved this month. Market is also worried about the supply demand dynamics for the next fiscal and how RBI will manage the large borrowing programme.”
The conflicting message from the global markets and the domestic policy actions has led to a fall in investor interest as they look for clarity.
Trading volumes have nearly halved amid lacklustre trades since February beginning, when finance minister Nirmala Sitharaman announced the Union Budget.
