Tag: cpi

Bond market enjoys its Yhprum’s law moment

Banking & Finance

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The bond market is experiencing the corollary of Murphy’s law – called the Yhprum’s law – that states, “Everything that can work, will work.”

Just when market participants were beginning to worry about the absence of the G-SAP announcement last week, two things happened. First, the CPI inflation number at 5.3 per cent stood reasonably below the market expectations. Second, and a crucial factor, is the talk on Indian government securities’ inclusion in global bond indices.

Comments made by the Reserve Bank of India Deputy Governor Michael Patra assuaged markets regarding future monetary policy normalisation. “We don’t like tantrums; we like tepid and transparent transitions – glidepaths rather than crash landings,” said Patra.

Market participants believe that even if the economy starts to pick-up further and inflation continues to remain under control, any rate hike may still be far away. “The envisaged glidepath should take inflation down to 5.7 per cent or lower in 2021-22, to below 5 per cent in 2022-23 and closer to the target of 4 per cent by 2023-24,” Patra stated in his speech. Bond traders are of the view that with no upside shocks to inflation or the second half borrowing figure slotted to be announced later this month, there is no reason in the near term to discontinue the bullish stance. “If the second half borrowing figure comes in below or at the ₹5 lakh crore mark, it should be positive for the market,” a trader said.

On the cards

Steam picking-up on India’s inclusion in global bond indices is another crucial factor that could soften the yields further. Principal economic advisor Sanjeev Sanyal reportedly stated that preparatory work for the inclusion of certain G-secs in global bond indices is over and there could be some announcement pertaining to the matter this fiscal. The matter has been on the cards over the last few years.

Interestingly, so much has been talked about this matter over the last few years that at one point, bond traders simply began to ignore the sound bytes regarding any news on index inclusion. However, the conviction seems to be stronger this time and the same seems to be reflecting across the trading community.

Last week, the benchmark yield traded between 6.15 and 6.2 per cent. Bond traders say that in the absence of any major trigger in the immediate short term, the 10-year should continue to trade in the range of 6.1-6.2 per cent with a bias towards long positions.

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Four ex-board members arrested, BFSI News, ET BFSI

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The crime branch team probing the fraud at the CPM-ruled Karuvannur Cooperative Bank on Monday arrested four former director board members, including former president K K Divakaran.

The probe team identified the other three arrested persons as Chakrampulli Jose, Thaivalappil Byju and Vakkayil Veettil Lalithan. While Divakaran, Jose and Byju are CPM activists and local-level leaders, Lalithan is a CPI activist. However, CPM has expelled Divakaran from the party and has suspended Byju for six months.

The party has not announced any action against Jose, so far. The CPI has also not announced any action against Lalithan.

The probe team led by K S Sudarshan, crime branch SP, had earlier arrested five persons, including the bank secretary Sunilkumar. The total number of persons arrested has risen to nine. However, Kiran, who is suspected to be the key accused in the case, is yet to be arrested.

The arrested people were the director board members since 2011. The crime branch team found that the financial fraud had started in the bank in 2011. Huge loans were sanctioned in the names of relatives of the arrested director board members, the SP said in a press release.

The bank authorities granted loans to people staying outside the operational area by giving membership on fake addresses, and by inflating the price of the land submitted as surety. Multiple loans were sanctioned on the same property submitted as surety, and on land against which property attachment notices were issued, Sudarshan said.

There were altogether 13 members on the dissolved director board; among them, former vice-president T R Bharathan has died. The probe team had listed all the remaining 12 members of the director board, apart from the office staff, as accused in the fraud estimated to be Rs 100 crore.

The charge against the director board members is that they connived with office staff in illegally sanctioning loans and siphoning off bank funds. The probe team indicated that the remaining eight director board members are also likely to be arrested soon.



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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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Spike in May retail inflation leads to drop in G-Sec prices

Banking & Finance

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Government Securities (G-Sec) prices dropped on Tuesday as the retail inflation reading for May 2021 spiked above the monetary policy committee’s upper tolerance threshold of 6-6.30 per cent against 4.2 per cent in April.

Given that MPC tracks the retail (consumer price index/ CPI-based) inflation gauge closely, if the reading sustains above the 6 per cent mark for another month or two, it will have to do a hard re-think on its ultra-loose monetary policy to tamp down inflation.

Price of the 10-year G-Sec (coupon rate: 5.85 per cent) came down by about 26 paise to close at ₹98.64 (previous close: ₹98.895), with its yield rising 4 basis points to 6.04 per cent (previous close: 6.00 per cent).

Price and yield of bonds are inversely related and move in opposite directions.

‘Double whammy’

Madan Sabnavis, Chief Economist, CARE Ratings, said, “The CPI inflation number at 6.3 per cent is higher than our expectation of 4.9 per cent and is a kind of double whammy for the economy coming as it does over a sharp increase in WPI (wholesale price index-based inflation) by 12.9 per cent.”

He emphasised that high CPI inflation will be a concern for the Reserve Bank of India (RBI) as it is higher than their estimate of 5 per cent.

“Though the stated policy is that growth is more important, which means that repo rate will not be touched, it will be a nagging issue nevertheless especially if inflation remains in this region. We expect it to be around 5.5-6 per cent in next couple of months,” Sabnavis said.

Price of the G-Sec maturing in 2026 (coupon rate: 5.63 per cent) fell 42 paise to close at ₹99.94 ( ₹100.36), with its yield rising about 10 basis points to 5.64 per cent (5.54 per cent).

Price of the G-Sec maturing in 2035 (coupon rate: 6.64 per cent) too declined 42 paise to close at ₹99.94 (₹100.36), with its yield rising about 4 basis points to 6.64 per cent (6.60 per cent).

Suyash Choudhary, Head – Fixed Income, IDFC AMC, observed that the May CPI print will likely on the margin push up the importance of inflation in the growth versus inflation trade-off for RBI.

“This doesn’t necessarily mean that the central bank will start to respond to this right-away. However, the bond market may step up speculation with respect to the shelf-life for RBI’s current ultra-dovishness.

“This may make the task of dictating yields to the market that much more difficult for the central bank. At any rate, in our base case view, RBI would have started to dial back on its level of intervention at some point and we were budgeting for a gradual rise in yields overtime,” he said.

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What is inflation-adjusted return – The Hindu BusinessLine

Personal Finance

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A phone call between two friends leads to a talk about inflation-adjusted returns.

Akhila: What are you up to, Karthik?

Karthik: I was planning to buy a television set for ₹50,000. But I later changed my mind to save and invest that amount to buy a better version next year.

Akhila: I hope inflation doesn’t eat into your returns.

Karthik: What do you mean?

Akhila: A few economists expect inflation to rise going ahead. If that happens, your inflation-adjusted returns can be low or even negative.

Karthik: Can you explain that?

Akhila: If you invest that ₹50,000 at four per cent p.a. in a fixed-income instrument, your investment will be worth ₹52,000 by year-end. Say, the average inflation over the next one year is six per cent and the price of the TV set which you decided not to buy, becomes ₹53,000. Let alone buying a better version, your investment amount won’t be sufficient to buy even the current model.

Karthik: Ouch!

Akhila: Inflation-adjusted returns, also called real returns takes into account the inflation rate while calculating the return on an investment.

Karthik: How do I calculate real returns?

Akhila: You can simply subtract the rate of inflation from the return on your investment. In the above example, the real return on your investment would be -2 per cent. That is, 4 per cent return minus the inflation rate of 6 per cent.

Karthik: That’s pretty simple.

Akhila: The above formula gives an approximate rate of real return. To be precise, you can use the formula — ((1+return)/(1+inflation rate)) – 1.

Karthik: Are there any savings instruments in the market that offer returns linked to inflation?

Akhila: There used to be inflation-indexed bonds but they are no longer available.

Karthik: Equities would give higher returns, right?

Akhila: Equity is said to deliver inflation-beating returns in the long-run. But remember, for the sake of earning higher inflation-adjusted returns, you should not go for investments that do not fit your risk appetite.

Karthik: What are the alternatives in the fixed income space?

Akhila: You can consider floating-rate instruments, coupon rates on which are linked to interest rate movements in the economy, which are a play of inflation as well.

Karthik: I remember reading the Simply Put column in BL Portfolio a few weeks back that talked about floating rate instruments such as Floating Rate Savings Bonds 2020, the PPF and the Sukanya Samriddhi Yojana.

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