Bonds Gain a Mirage as India Keeps Door Open to Future Rate Hike

(Bloomberg) — Bonds traders were fast to cheer the Reserve Bank of India for keeping rates on hold last Friday. The gains may prove fleeting.

While the central bank surprised by keeping borrowing costs unchanged, it changed its stance to “calibrated tightening” from neutral, signaling more hikes lie ahead. Add to that concerns about soaring oil prices and the tumbling rupee, investors are left with a cocktail of risks at a time when emerging-market assets have seen a vicious selloff.

“It looks like a brave call, hoping the macros will turn in India’s favor,” said Naveen Singh, head of fixed-income trading at ICICI Securities Primary Dealership Ltd. in Mumbai. “In the future, they might have to hike more sharply” given risks to inflation, he said.

While the 10-year yield slid 13 basis points to 8.03 percent on Friday, the RBI’s decision, predicted by just nine of 49 economists surveyed by Bloomberg, sent the rupee past the 74 to a dollar mark for the first time and pushed the nation’s equities into a correction.

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“The unchanged decision suggests that the RBI is not overly concerned about rupee depreciation,” said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore. “Yields will likely struggle to move below 8 percent.”

HDFC Bank Ltd. expects the benchmark yield, which is near the four-year high touched last month, to reach 8.20 percent by year-end.

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