Indian Prime Minister Narendra Modi just sent a strong message to foreign bond investors without uttering a word.
His administration’s choice of deputy governor Urjit Patel to take over from Raghuram Rajan in September suggests a sustained focus on curbing living costs, after the Oxford-educated Patel helped the governor implement an inflation target. HSBC Holdings said its bullish view on India is reinforced by the appointment, which Aberdeen Asset Management said lays to rest uncertainty about policy continuity. PineBridge Investments said it will help draw money to the Asian nation.
“Patel will be tough on inflation and this will be good for bond markets and deliver economic benefits in the long run,” said Leong Lin Jing, Singapore-based investment manager at Aberdeen Asset. “Patel’s appointment is confirmation that Prime Minister Narendra Modi is committed to reforms.”
While India’s markets initially priced in lower expectations for RBI interest-rate cuts, bonds stabilised on Tuesday and the rupee rallied as concern alleviated that policymakers would trade financial stability for short-term stimulus. Rajan’s decision to return to academia came as a Modi ally attacked him for keeping interest rates too high. Inflation climbed to a 23-month high in July and, while it is below levels that helped topple the last government, it remains a concern for a nation that the World Bank estimates is home to the world’s largest number of poor people.
Patel burnished his inflation-fighting credentials after a panel he headed in 2014 suggested a consumer-price goal and the formation of an independent monetary policy committee to decide interest rates. Modi’s government this month agreed to a target of 4% through 2021, while allowing fluctuations in a 2% to 6% band, while the policy panel is expected to be formed this year.
During an interaction with reporters in 2014, he said the central bank was neither a hawk or a dove, but an owl. “An owl is traditionally a symbol of wisdom, so we are neither doves nor hawks but owls, and, we are vigilant when others are resting.”
Vigilance will now be warranted after inflation climbed for a fourth month to 6.07% in July. The CPI data halted a sovereign debt rally that had driven the 10-year yield to the lowest since September 2009. It has climbed 8 basis points since to 7.16 yesterday. A gauge of 10-day historical volatility in Indian notes due in a decade fell to 3.23% from 3.77% on Tuesday. HSBC predicts the yield will drop to 6.5% as the central bank enforces inflation targeting and purchases bonds worth Rs1.8tn ($27bn) in the year through March 2017.
“Enhancing the institutional framework to support the RBI’s efforts to meet their main goal of stable inflation will be high on the agenda to maintain a positive outlook for foreign investors including ourselves,” said Anders Faergemann, a London-based senior sovereign portfolio manager at PineBridge, which manages assets worth $80.7bn.
Modi’s pick for governor comes ahead of elections due next year in the prime minister’s home state of Gujarat and the most-populous state of Uttar Pradesh. Despite this, Modi resisted the temptation to appoint someone who will promote short-term growth at the expense of long-term development, Aberdeen said.
Stable inflation would add lustre to Indian yields that are already the highest among major Asian markets despite the 10-year rate dropping 29 basis points in July and 60 basis points this year. Similar-maturity Indonesian securities yield 7%, while China’s offer 2.7% and the US’s 1.55%.
“Inflation is the biggest enemy of bond markets and to that extent this appointment indicates commitment of policymakers towards curbing it and will be viewed very positively by foreign investors,” said Himanshu Malik, a strategist at HSBC Holdings in Hong Kong. “Dr Patel’s appointment further strengthens our bullish view on Indian bonds.”
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