Podcast 15th May 2015
Global bond yield movements are causing pain for the Indian government. Sensex and Nifty have fallen from highs, government bond yields are rising and INR is weakening. One year of Modi government is not receiving a good scorecard with the market, analysts and media. Fears of FIIs taking money out of India on lack of on the ground reforms, lack of economic robustness and global market volatility are giving away to longer term optimism that was there when the Modi wave hit India in May 2014.
To be fair to the government, one year may be too short a period of time to undertake massive reforms or an overhaul of the economy. However market patience is low and when things start going wrong, blame is thrown at everyone except the market’s short term foolishness in expecting things to go right at all points of time.
The government as it is wont, is clamoring for the RBI to cut rates to spur economic growth despite giving the central bank a formal inflation target. FM, Arun Jaitley and his economic advisors have been vocal on need for lower interest rates and a weak INR to boost export competitiveness. Dr. Rajan, the RBI governor has a focus on strengthening the internal value of the INR.
Dr. Rajan has time and again cautioned on the excessively loose monetary policy followed by Central Banks globally led by the Fed and followed by ECB and other major Central Banks. The bond market volatility “Read our analysis on Global Bond Bubble and its Impact on Markets” is caused by fears of inflation and its impact on record low bond yields. The record low bond yields globally have prompted a search for yields that has led to FIIs pouring money into INR bonds, with purchases of USD 27 billion in fiscal 2014-15.
Inflation is still benign globally but market fears it could pick up on growth. Cheap and loose Central Bank liquidity can lead to disastrous consequences when withdrawn. India too has seen inflation come off with CPI inflation below 5% and WPI inflation in negative territory but this may be fleeting if El Nino disrupts weather patterns, global oil and commodity prices rise on supply disruptions and if INR falls on the back of FIIs pulling money out of the country on risk aversion.
It is important for RBI to keep its calm, build up foreign exchange reserves and adopt cautious policy in the face of a potential global bond bubble burst.
The FM should stick to the path of fiscal consolidation and implement reforms especially indirect tax reforms through GST. This is the only protection India has against excessively volatile global financial markets. FM should listen to Dr. Rajan who understands all too very well the impact of global shocks on markets and economies.
Attend our Second Knowledge Workshop on Liquidity on 22nd May 2015 at Sofitel BKC Mumbai to discuss the Effects and After Effects of Global Bond Bubbles. Please call Neelima at +919819770641 or log in to INRBONDS.com to register. Thank you for listening in.