scorecardresearchRBI Assurance May Not Ease India Bond Selloff, Top Fund Says

RBI Assurance May Not Ease India Bond Selloff, Top Fund Says

Updated: 15 Jun 2022, 07:51 AM IST
TL;DR.

Indian central bank’s verbal pledge to support a record government-borrowing program hasn’t been backed by actions so far and that may lead to a deeper selloff in the bond market, according to a top fund manager.

Guwahati, June 11 (ANI): Reserve Bank of India (RBI) Governor Shaktikanta Das interacts with the faculty members of the Indian Institute of Bank Management (IIBM), in Guwahati on Saturday. (ANI Photo)

Guwahati, June 11 (ANI): Reserve Bank of India (RBI) Governor Shaktikanta Das interacts with the faculty members of the Indian Institute of Bank Management (IIBM), in Guwahati on Saturday. (ANI Photo)

(Bloomberg) -- Indian central bank’s verbal pledge to support a record government-borrowing program hasn’t been backed by actions so far and that may lead to a deeper selloff in the bond market, according to a top fund manager. 

The RBI “has just started doing a little bit of open-mouth operations in the sense they want the yield curve to behave in a more orderly way,” said Kaustubh Gupta, co-head of fixed income at Aditya Birla Sun Life Asset Management, India’s fourth-largest asset manager. “The action is still missing.”

Even while Reserve Bank of India Governor Shaktikanta Das has assured the markets of supporting the borrowing plan of 14.3 trillion rupees ($183 billion), the authority has refrained from implementing any steps such as direct purchases unlike last year. That along with rate increases has roiled sentiment, weighed by the global selloff.

“The time to short bonds has gone but it’s not yet time to go long as there is still some pain to come on the longer end due to mismatch between supply and demand,” said Gupta, whose Aditya Birla Savings Fund has outperformed 91% of peers in the last year. He expects the 10-year bond yield to rise as high as 8% in the next 3-to-4 months. 

Governor Das last week said the central bank would take all steps needed to ensure an orderly completion of the borrowing plan, without giving details. The RBI has greater flexibility to undertake the so-called Operation Twist style open-market operations, where the bank buys longer-maturity bonds and sells shorter notes, he said. 

But, the central bank has been selling bonds in the secondary market as its focus has shifted to tackling inflation, and that suggests yields may climb higher, according to Gupta, who oversees about $20 billion in assets.

The yield on India’s 10-year bond has climbed more than 100 basis points this year. It fell two basis points on Tuesday as retail inflation eased more than economists expected. Still, data Tuesday showed, India’s wholesale-price inflation accelerated for a third month in May.

Given the market volatility, the Aditya Birla Savings Fund had nearly 60% of assets in cash as of end-May, according to Bloomberg data. The company said, the fund currently holds 17% in cash and cash-equivalent instruments. Gupta favors the one-to-1.5 year part of the yield curve and expects the RBI to raise repo rate to 6% by the end of this year, from 4.9% now.

The “RBI is withdrawing liquidity at a very fast pace, normalizing the policy rates in a fairly non-calibrated manner,” he said. “Given this, it may still make sense to stay out of the longer end part of the curve and wait to see more credible action from RBI in terms of their discomfort with the yield curve.”

First Published: 15 Jun 2022, 07:51 AM IST