India’s cenbank needs to focus more on inflation to tackle soaring yields, traders say

NEW DELHI/MUMBAI, Feb 9 (Reuters) – Indian debt traders have dismissed government officials’ concerns over bond mispricing, saying they reflected fundamentals but the central bank was behind the curve, and called for measures to tackle inflation at Thursday’s policy meeting.

As high global crude prices, tightening in other markets and potential rate hikes by the U.S. Fed weigh on sentiment, investors turned more bearish on Indian bonds after the government unveiled a recovery plan. record borrowing in the market last week.

The yield on 10-year benchmark bonds hit a 2.5-year high after the government announced a borrowing target of 14.95 trillion rupees ($199.84 billion) for the next financial year.

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That was nearly 2 trillion rupees more than markets had expected to fund the government’s “growth budget” at a time when the economy appears poised for a sustained recovery.

“With the government well and truly accepting the mantle of boosting growth, the RBI no longer needs to prioritize growth over inflation,” said Arvind Chari, chief investment officer at Quantum Advisors. .

“Their current position of ‘policy accommodation for as long as necessary to revive growth’ needs to be changed.”

He was among six top traders at major bond trading institutions who told Reuters the central bank needed to change course to fight inflation.

Some senior government officials agreed, fearing the central bank was focusing too much on boosting growth at the expense of its core inflation mandate, and risked being forced to raise rates more aggressively in the future. to come up.

“The government will focus on growth and the monetary policy committee should be dealing with inflation now,” said an official, who declined to be identified due to the sensitivity of the topic.

There was no immediate comment from the central bank.

The bank’s Monetary Policy Committee (MPC) has kept the key repo rate at record lows since May 2020, reiterating that it will continue to support growth and maintain its dovish stance until the economic recovery. be firmly rooted.

However, market participants believe it is time for the RBI to refocus on controlling inflation and at least change its stance from “neutral” to “accommodative” in the next review. Read more

Retail price inflation accelerated to a five-month high of 5.59% in December from a year earlier, while inflation based on wholesale prices, an indicator of production, fell slightly to 13.56%, but remained in double digits for nine months.

PEAK YIELD

Officials said the sharp rise in yields last week caught them by surprise, stoking concerns about soaring borrowing costs.

The move indicates the market was “misinformed”, a senior finance ministry official said, adding that current yield levels were “unacceptable”.

In a rare move, the government canceled its 240 billion rupee bond auction scheduled for February 11 after a review of its cash balance. Read more

Finance Ministry officials said the cancellation was also a signal that the government was not comfortable with yield levels and was ready to “take on the market” to defuse price-based swaps. “speculation”.

The central bank has forced auction underwriters to buy papers and even canceled individual bonds at auctions in recent weeks to avoid the very high yield thresholds sought.

Some foreign investors said they were reluctant to buy Indian bonds at current levels as the RBI was unwilling to acknowledge the looming inflation problem.

“The RBI always calls market participants and asks what we want. We want nothing more than a fair price,” said a senior trader, who requested anonymity because conversations with the RBI are meant to remain. private.

“Markets are not overreacting, markets are trading on fundamentals. If the RBI and the Ministry of Finance think we are being unfair, then they should take concrete action to show us how wrong we are.”

Traders said the central bank bought bonds on its books last year when the market bid at uncomfortable levels for the RBI and it should continue to do so if it is unwilling to accept the higher yields at auction .

Another trader, who did not want to be identified, confirmed that the RBI had made calls last week requesting bond purchases at market levels, but said he was unenthusiastic and he had stayed away.

“This level of yield is not a good enough value to justify buying Indian bonds,” he said, adding that the RBI’s focus on growth was “far from reality” unlike to other key economies.

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Reporting by Swati Bhat; Editing by Clarence Fernandez

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