Tag: Consumer Price Index

Bond traders await G-SAP auction announcement, CPI figure

Banking & Finance

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Among the prevailing bullishness in the bond market, the one thing that disappointed traders last week was the absence of the anticipated G-SAP auction announcement by the Reserve Bank of India (RBI) where the Central bank conducts open market purchase of government securities.

The bond market was expecting the RBI to make the announcement on Thursday for the auction to be conducted this week, which did not happen. A trader said although this is not a reason to worry, the usual norm so far has been an announcement in the first 10 days of the month.

The Central bank had announced secondary market purchase operations of ₹1.20-lakh crore in its June monetary policy. The RBI has so far purchased securities to the tune of ₹90,000 crore cumulatively in July and August under the programme.

Another key trigger for the market this week would be the release of the consumer price index (CPI) inflation figure for August. Market participants are of the view that inflation is likely to remain subdued in the coming times which will cushion the bond yields, at least till the end of the year.

‘Persisting bullishness’

Ananth Narayan, Professor-Finance at SPJIMR, believes that the broad expectation for the next few months is that inflation is going to be much lower than what the MPC has been anticipating.

“This will help them to remain dovish in their stance. Also, the tax collections are looking good which is providing relief on the fiscal side. For August, I believe the CPI should come in at close to 5.6 per cent and core inflation should come just below 6 per cent.

The risks for the bond market include a sudden spike in inflation that looks unlikely, any external shock and the complacency in terms of the persisting bullishness in the bond market,” he said.

The benchmark yield hit levels close to 6.20 per cent on the higher side before closing the week at 6.18 per cent. Traders are of the view that the 6.25 per cent level will act as a support in the near term and the yield is unlikely to shoot beyond this mark unless there is any unanticipated shock in terms of inflation or external factors.

The market is also keeping an eye out for the second half borrowing calendar that is expected to be released later this month. Bond traders indicated that the government’s market borrowing in the first half of FY22 is likely to stand at close to ₹7-lakh crore and the second half borrowing should be anticipated at around ₹5-5.50-lakh crore.

Traders believe that if the figure remains anywhere close to ₹5-lakh crore or below, it will be a positive for the bond market.

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Why controlling inflation is not the job of the RBI Governor alone, BFSI News, ET BFSI

Personal Finance

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In 2021, the focus of policymakers across the globe is to not just recover and sustain growth but also to ensure price stability. Not only emerging economies, but even developed economies are dealing with price pressure. The rising inflation rate has prevented many economies from announcing further stimulus measures. Central banks in some countries have gone for a rate hike even when their own economies have not fully recovered from the pandemic-induced economic crisis.

One of the major contributors for the overall rise in inflation is the surge in commodity prices. Within commodities, rising crude oil prices has burdened oil importing countries including India. In July, India imported $12.89 billion worth of petroleum crude & products (POL). And, in the same month, POL accounted for a share of 27.7 percent of the total imports to the country.

In India, inflation rate, as measured by the Consumer Price Index (CPI), is used as RBI’s monetary policy anchor. Within CPI, fuel and light account for a share of 6.84 per cent. Though the share of fuel in the CPI basket is less than 10 per cent, crude prices have a huge impact on the overall inflation rate. Higher fuel prices have a ripple effect on other commodities. Crude oil is used as a raw material in various sectors, with petrol/diesel used in transportation of goods. When the cost of production goes up, it will be passed on to consumers.

In the current situation, higher prices for goods and services is an additional burden on both the consumers and producers. The Indian economy is still in a nascent stage of recovery. An economy in the recovery stage won’t be able to tolerate a higher inflation rate. Inflation rate in July has cooled off to 5.59 per cent, within the upper tolerance band of 6 per cent. However, we need to closely watch how inflation figures would turn out in the coming months. The fall in the overall inflation rate has been mainly contributed by the decline in food prices. Food inflation declined to 3.96 per cent YoY in July’21 from 5.15 per cent in June’21. Yet, during the same period, fuel and light inflation registered only a marginal decline to 12.4 per cent from 12.6 per cent.

At this juncture, both the central and state governments should consider ways to reduce the burden arising from increasing fuel prices. The RBI Governor has explicitly stated on many occasions the need for coordinated action between the Centre and states on tax reduction on fuel prices. Presently, the central government levies an excise duty of Rs 32.9 per litre on petrol while the VAT levied by state governments vary. A reduction in the excise duty and VAT could lead to an increase in disposable income in the hands of the common man. This, in turn, could improve consumer sentiments and prevent the heating up of the economy.

In India, controlling the inflation rate is not just the RBI’s job. The factors contributing to rising inflation in the country calls for a concerted effort from the central bank and Centre/state governments.



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