India keeps door open to rate hike


Bonds traders were fast to cheer the Reserve Bank of India for keeping rates on hold. 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, 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.
“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.
The central bank’s September survey on households painted a mixed picture about price pressures. While inflationary expectations for the three months ahead rose sharply by 50 basis points, a year down the line those expectations were lower by 30 basis points compared to the survey in June.
The decision by the RBI comes at a time when liquidity conditions have tightened and there are worries that defaults by a systemically-important financier could lead to a contagion. Authorities have moved to rin-gfence Infrastructure Leasing & Financial Services Ltd., while the RBI has pledged to inject $5 billion into the system through bond purchases as it tries to ease the liquidity squeeze.

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