The government kicked off a party in the bond market last week. And the RBI won\u2019t want to spoil that.<\/p>\n
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.<\/p>\n
\u201cThe monetary policy will recognize the central government\u2019s move, and probably give a thumbs-up to it,\u201d said Lakshmi Iyer, chief investment officer for debt at Kotak Mahindra Asset Management Co. \u201cThere will be a status quo.\u201d<\/p>\n
Inflation aside, the Reserve Bank of India\u2019s 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.<\/p>\n
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\u2019s medium-term target of 4% and the current 4.4%.<\/p>\n
That\u2019s underpinning expectations of a rate hike, with the swap market pricing in at least one 25 basis point hike in 2018.<\/p>\n
Economists say the Reserve Bank of India is poised to stay on hold at its April meeting, and strike a dovish tone in its statement. That would dial back hawkishness at its last meeting, as the monetary policy committee assesses an inflation slowdown that\u2019s going against its outlook. — Abhishek Gupta, Bloomberg Economics<\/p>\n
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 April 1, while also reducing its annual debt sale.<\/p>\n
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\u2019s bond market to foreigners.<\/p>\n
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 benchmark 10-year bond yield fell 3 basis points to 7.30% on Wednesday.<\/p>\n
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\u2019s also the period when companies tend to enter the market, the government\u2019s activity could have a wider effect on growth.<\/p>\n
\u201cThere is no doubt Indian companies will be crowded out,\u201d said Prabal Banerjee, group finance director at conglomerate Bajaj Group. Market borrowing costs will rise for companies by 25-50 basis points, he said.<\/p>\n","protected":false},"excerpt":{"rendered":"
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