Reflects a sense of uncertainty ahead of Tuesday’s policy action by RBI

Bond prices reacted sharply on Friday in the wake of the Reserve Bank of India Governor Raghuram Rajan using strong words and terming inflation ‘a destructive disease’.

The benchmark 10-year bond yield was up seven basis points at 8.74 per cent, the biggest single-day rise in nearly a month. Bond yields have risen by 11 basis points in the week, snapping a three-week falling trend.

The rise in bond yields is reflective of a sense of uncertainty that has gripped the markets ahead of Tuesday’s policy action by the Reserve Bank of India.

The ‘destructive disease’ comment of Dr. Rajan on inflation came a day after an RBI panel advocated a shift towards a CPI (consumer price index)-centric monetary policy, and recommended a roadmap for achieving this. The Governor’s comment, read in tandem with the panel’s recommendations, suggests the possibility of a policy rate hike, turning investors and the market alike edgy.

Dr. Rajan’s ‘destructive disease’ comment has already elicited sharp reaction from the Finance Minister P. Chidambaram, who is in Davos attending the World Economic Forum. The Minister maintained that inflation was one among the objectives and that growth was equally important.

Economic Affairs Secretary Arivind Mayaram, on Wednesday, asserted that “it is premature to use CPI as nominal inflation anchor’’. According to Dr. Mayaram, “CPI has lot of imperfections. It requires a whole lot of sophistication, which we have not achieved yet on determining CPI.”

These comments and counters have yet again raised questions whether the monetary and fiscal managers are working at cross purpose.

All these, nevertheless, have landed the markets in a fresh uncertainty.

At the foreign exchange market, the rupee slid to a two-week low at 62.19 a dollar. Stock markets, too, reacted sharply with the Sensex shedding 1.12 per cent at 21133.56. The broader Nifty closed 1.24 per cent lower at 6266.75.

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