Central bank’s mixed signals make bond markets jittery

Higher yields push up overall interest rates in banks

India’s bond market has plenty of reasons to cheer if recent policy developments are anything to go by, but market participants say mixed messages from the central bank have left investors nervous and confused.

The Reserve Bank of India had in early April softened its hawkish tone, relaxed accounting rules around bond losses and raised the foreign debt investment limit, factors that should all be supportive for the sovereign debt market. But while government bonds rallied briefly on these developments, a lack of direct RBI intervention in open market operations has left state banks — the largest group of sovereign bond investors — confused and cautious.

Market volatility

This in turn has added to market volatility and pushed yields sharply higher, impacting not only the government’s borrowing costs, but also interest rates in the overall economy at a time the Indian economy is just beginning to rebound.

“The lack of demand from public sector banks is clearly reducing trading risk appetite,” said Anindya Das Gupta, MD and head of trading at Barclays India. “If this continues then that will create more volatility.” In an example of the sharp swings, the 10-year benchmark bond yield hit its highest in two months on Friday after minutes of the RBI’s April 5 meeting showed a more hawkish posture than that communicated through the policy statement on the meeting day, when the bank cut its inflation projection.