WORLD MONEY
John Carville, the lead strategist of the first Bill Clinton presidential campaign, is reported to have claimed, “When I die I want to come back as the bond market because apparently it’s more important than the f***g Pope!” Carville did have a point. The bond market might not have the oomph of the stock-market but it tells us, in one lithe movement of the bond yield, a myriad of things — investor expectations of inflation and growth, the likely monetary policy path of the central bank, evolving liquidity dynamics and the fluctuations in the fiscal balances of the government.
So what’s the Indian bond market indicating? Before answering that a recap of recent events might help. Last month, for the first time in 14 years, the rating agency Moody’s raised India’s sovereign bond rating from Baa3 to Baa2. A sovereign credit rating is an assessment of the level of risk associated with investing in a particular country. Going by the scheme that Moody’s follows, India moved from being lowest in the investment-grade ranking to the second lowest.
Another big event last month was the cancellation of an open market operation (OMO) of ~10,000 crore by the Reserve Bank of India. Since July, the central bank has conducted nine OMOs (bond sales) to drain out ~90,000 crore worth of liquidity from the market.
While the 10-year bond yield declined by around 15 basis points — its biggest slide since November 2016 (after the upgrade and OMO cancellation) — the feel good factor lasted just for a day or two. The ‘bears’ didn’t take long to appear back in the market and after the dust had settled, the benchmark 10-year yield rose back to its one year-high of around 7 per cent.
The muted reaction of the bond market to such favourable events suggests that there are risks that worry investors. The rise in international oil prices has stoked concerns about a quicker rise in inflation and dashed hopes for a rate cut from the Reserve Bank of India (RBI). Then, there is the US Fed factor. Globally, bond markets have started factoring in the US Federal Reserve’s hike in its policy or Fed funds rate in