The inflation shock is adding to uncertainty on whether the central bank would stick to its pledge of keeping policy accommodative to support growth after the economy was battered by a deadly Covid wave
A spike in inflation reading this week has revived a debate among sovereign bond traders in India over how long the central bank could retain its dovish policy stance.
The yield on India’s benchmark 10-year bonds surged to its highest since April, while the borrowing cost on Treasury bills rose to the highest in more than a year this week. That’s a sign that some investors are bringing forward bets for policy normalization by the Reserve Bank of India after retail inflation recently crossed the central bank’s comfort zone of 2%-6%.
The inflation shock is adding to uncertainty on whether the central bank would stick to its pledge of keeping policy accommodative to support growth after the economy was battered by a deadly wave of Covid-19 infections. RBI Governor Shaktikanta Das said “it’s too early, it’s too premature” to discuss policy normalization at a review earlier this month.
“This inflation reading can be treated as an inflection point for the bond market,” said Pankaj Pathak, fund manager at Quantum Asset Management Co Pvt Ltd. “This can change the course of the monetary policy direction.”
Some investors are already bracing for a shift.
The nine-month and 1-year swaps are now factoring in reverse repo hikes in October as against December earlier, said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership Ltd. IDFC Asset Management said it has raised cash holdings in its bond funds to 20%-35% as of June 14.
Radhika Gupta, chief executive officer at Edelweiss Asset Management Ltd. said she is sticking to cash on the shorter end instead of 1-2 year bonds while seeing opportunities in 5-10 year parts of the yield curve as she sees Asia’s third-largest economy bottoming out this quarter.
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