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The Reserve Bank of India (RBI) on Wednesday said domestic bond markets had already factored in some of the impact of a possible interest rate rise in the US, following strong jobs data last month.
“A fair bit of bond prices have priced in what is likely to happen in the US,” RBI Deputy Governor Urjit Patel said in a post-monetary policy conference call. “The amount we are talking about is what has not been priced in. There are judgements on how much and how quickly the interest rates in the US will rise.”
RBI, however, clarified the monetary policy wouldn’t be decided on external factors. “Our policy will be determined solely by reading our inflation data point and projections thereof,” Patel said.
RBI Governor Raghuram Rajan, who also participated in the conference call, said as inflation data was released, the central bank would have a better view of things and adjust accordingly. “So, I shouldn’t assume we’re either biased towards raising rates or cutting rates at this point,” he said.
At its bi-monthly monetary policy review on Tuesday, RBI kept the repo rate unchanged at eight per cent, citing upside risks to its inflation target of six per cent by January 2016.
The central bank feels Indian markets will see some impact when the US starts raising policy rates. Any decision by the US Federal Reserve to raise rates, maintained at near-zero since December 2008, might have implications for emerging market economies such as India, as it could lead to capital outflows.
The debt market in India has been attracting foreign flows continuously. This year, debt flows have surpassed equity flows. The yield on the 10-year benchmark bond has been easing and the limit for foreign institutional investors (FIIs) in government bonds has nearly been exhausted. As such, now, flows are coming into corporate bonds.
Experts say some of these FIIs might pull out when the US starts raising interest rates, as FIIs have been investing in corporate debt in the two-three-year bracket to take advantage of arbitrage opportunities.
Against 8.55 per cent on September 1, the yield on the 10-year bond closed at 8.48 per cent on Wednesday. On Tuesday, it closed at 8.51 per cent.
“We want a steady increase in limits so that we understand what is happening and we see the market develop as these limits are increased. We think foreign portfolio investors are extremely important to market development,” Rajan said.
In July, RBI had raised FIIs’ sub-limit in government bonds by $5 billion, after the $20-billion limit was nearly exhausted. However, the overall limit for FII investment in government bonds was kept unchanged at $30 billion.
“Over a period of time, we will re-examine the limits and see what we can do,” Rajan said.
More flows into the corporate bond market would help develop it, Rajan said. “Given we set the limits for both markets carefully, I don’t see why just because the limit for the government debt market is full right now, we should diminish the limit for the corporate debt market,” he said.
Patel said as of now, there were no plans to include India in the global bond index, owing to issues pertaining to removing the ceiling on foreign investment in bonds. He added, “It is not an event that can happen very quickly. We did get a fillip recently from an upgrade in the outlook from a credit rating agency. I think we are in pretty good shape, even without being part of the index.”
Rajan said RBI was in talks with Euroclear, the world’s largest securities settlement system, to see if bond trading could be carried out. “The actual trades will be conducted in India, but the investor can work elsewhere. Let’s see how that plays out,” he said.
FINGERS CROSSED
- RBI will re-examine FII limits on government bonds
- Limits to be opened in a calibrated manner
- FII flows coming into corporate bonds shall help develop the market
- At the moment, no plans to be a part of any global bond index
- Talking to Euroclear if actual trades could be conducted in India
- Not biased towards either raising or cutting interest rates
- Monetary policy stance to depend on inflation data
