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  1. Bonds rally as expectations of CPI inflation improve

Bonds rally as expectations of CPI inflation improve

Bonds rallied on Monday as the market anticipated that the Consumer Price Index (CPI) inflation for February may come in lower than earlier expectations.

By: | Mumbai | Published: March 13, 2018 3:21 AM
Bonds, CPI, CPI inflation, Consumer Price Index, economy Bonds rallied on Monday as the market anticipated that the Consumer Price Index (CPI) inflation for February may come in lower than earlier expectations.

Bonds rallied on Monday as the market anticipated that the Consumer Price Index (CPI) inflation for February may come in lower than earlier expectations. The benchmark yield closed four basis points down at 7.63% after sliding to a low of 7.619% on Monday. Bond market participants told FE that CPI inflation expectations had come down to 4.5% from the earlier expectation of 4.8%. CPI inflation for February was reported at 4.44% post-market hours on Monday, compared to 5.07% for January. Market participants also pointed out that there was a speculation that the Reserve Bank of India (RBI) might provide some sort of forbearance to public sector banks (PSBs) with regard to mark-to-market (MTM) losses. According to sources, speculation centred around the central bank offering a one-time opportunity to banks to shift bonds from the available-for-sale (AFS) category to the held-to-maturity (HTM) category, following which PSBs could avoid MTM losses in the fourth quarter. Further, it was speculated that the RBI might allow banks to make provisions for the MTM losses over a period of two to three quarters, so that banks don’t need to take the entire hit in a single quarter. FE could not independently verify the speculations. Sources have also told FE that the RBI has had talks with PSBs to understand the MTM losses the banks have made for the December quarter and to understand how much the banks expect as MTM losses for the March quarter. One PSB treasurer, on condition of anonymity, confirmed to FE that they indeed received a call from the RBI. “The call came a few weeks back. They wanted to know how much MTM losses we made in Q3 and how much do we anticipate for Q4. However, we are not yet sure whether the RBI might allow any forbearance because this would be sort of backtracking on the stance that they have taken so far,” said the banker. An email sent to an RBI spokesperson remained unanswered. Bond dealers indicate that they also are in the dark about the veracity of the speculations, but suggested that such a forbearance would be a great positive for PSBs, which will then likely see them resume participation in the bond market. PSBs have reduced their buying in the bond market as they are staring at huge MTM losses. Moreover, their SLR holdings are also considerably above the regulatory requirement. Since August last year, the yields have been on the rise with the benchmark yield hitting a high of 7.82% in February. Foreign portfolio investors (FPIs) have also started to exit their positions in Indian bonds with over $703 million net selling seen in the last four sessions. This has led to the net FPI investments in Indian bonds declining to a mere $212.20 million since the start of the year.

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