RBI policy flip-flop troubles bond traders

mumbai — Three out of three. That’s how many times the Reserve Bank of India’s monetary policy panel has wrong-footed the markets since its October debut. Its latest surprise last Wednesday triggered a five-fold jump in bond volatility, with the benchmark notes posting their biggest loss since 2013.

The move to unexpectedly hold borrowing costs unsettled traders who argue that authorities’ prior commentary had suggested they were comfortable with the inflation outlook and gave market participants the impression that an interest-rate cut was on the cards. The accompanying change in the policy stance to neutral from accommodative hardened the blow for the markets.

“You can’t move a car from third gear to neutral,” said Lakshmi Iyer, Mumbai-based chief investment officer for debt at Kotak Mahindra Asset Management. “Maybe the central banker could have been a tad more pro-active in guiding the markets, providing cues and nuances between policies. The carnage in the bond market may not have been so acute.”

India’s 10-year bond yield surged 31 basis points on Wednesday and another 12 basis points on Thursday as investors started unwinding bets for further easing. It was little changed at 6.8 per cent on Monday. A gauge of 10-day historical volatility on the notes has since climbed to 26.7 per cent, the highest since 2013, from 4.6 per cent on Tuesday. Foreign holdings of local government and corporate debt dropped by ₹8.3 billion ($124 million) on the policy day.

“This sudden shift in gear has left quite a few investors, including foreigners, baffled,” Iyer said.

Authorities held rates even while saying that India was unlikely to overshoot its March 2017 inflation goal of five per cent. Consumer price gains probably slowed to 3.24 per cent in January, the median estimate in a Bloomberg survey shows before official data due later on Monday. December’s 3.41 per cent increase was the smallest since November 2014. — Bloomberg