Bonds, stocks, rupee drop as choice of Patel for RBI dims rate cut hopes

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Bond prices fell on Monday as investors paused their recent liquidity-fuelled purchases of government debt to take stock of the appointment of Reserve Bank of India (RBI) Deputy Governor Urjit Patel as its next head. The yield on the benchmark 10-year bond rose 6 basis points to 7.16 per cent.

The Centre had on Saturday announced that Dr. Patel would succeed Raghuram Rajan as RBI Governor early next month. Dr. Patel, who was a key architect of the new monetary policy framework that prescribes inflation-targeting as the central bank’s primary objective and is viewed in the markets as an “inflation hawk”, is likely to take charge on Sept. 6 as Monday Sept. 5 is a local holiday in Mumbai for Ganesh Chaturthi. “There could be some knee-jerk sell-off in bond markets as the euphoria of extensive monetary easing moderates,” Samiran Chakraborty, chief economist Citi India, said, commenting on the appointment of the new governor.
Inflation target

The medium term objective of RBI is to attain 4 per cent retail inflation with a tolerance band of plus, minus 2 percentage points. CPI (Consumer Price Index)-based price gains accelerated to 6.07 per cent in July.

Against this background, market participants are not expecting any immediate interest rates cuts.
Some scope

“We continue to expect that some scope for rate cuts could emerge as the “upside risks” to the CPI breaching the RBI’s 5 per cent target for March 2017 are lowered, though given our current CPI forecasts, we do not expect the repo rate to be lower than 6 per cent in FY17,” Mr. Chakraborty said.

Bonds prices had rallied in recent times and yields touched 7.08 per cent on Aug. 11, their lowest level since September 2009.

Equity markets also ended lower on Monday with banking stocks coming under pressure as the new governor is expected to pursue to completion the clean up of banks’ bad loans. The Sensex slid 0.33 per cent, or 91.5 points, to close at 27,985.54, while the Nifty 50 index fell 0.44 per cent to 8629.15.“The appointment (of Mr. Urjit Patel) as the new RBI Governor signals the reassertion of policy continuity by policy-makers,” rating agency India Ratings wrote in a report. “Bond gains are likely to halt and the currency will continue to face global risk shifts.”

“The agency believes market perception of Dr. Patel as an ‘inflation hawk’ will anchor the rupee’s near-term movement,” it added.

The central bank will announce its next monetary policy review on October 4, most likely under the new framework where the rate decision will be taken by the Monetary Policy Committee, which is headed by the RBI Governor.

Not many market participants expect a rate cut in the October policy meeting as retail inflation is higher than the central bank’s March 2017 target of 5 per cent.