The rally in Indian sovereign bonds has met a surprising foe: inflation in the midst of the nation’s worst slowdown in more than four decades.
A surge in consumer prices, and expectations that it could exceed 10% in three months, is raising the specter that the Reserve Bank of India’s easing cycle is nearing its end months after it cut rates to revive a virus-ravaged economy.
That has become an all-consuming topic among Mumbai traders, who were nervously looking over their shoulders even when bond yields were near a decade-low earlier this month. With two poor consecutive debt auctions, the looming risk of stagflation raises questions over Prime Minister Narendra Modi’s plan to borrow a record 12 trillion rupees ($160 billion).
“The outlook is one of worry about inflation combined with hopes of bond purchases by the RBI,” said Harihar Krishnamoorthy, treasurer at FirstRand Bank Ltd. in Mumbai. “Inflation in the short term is likely to remain sticky and elevated, leaving little room for the RBI to cut rates till the year-end.”
Yields on the benchmark 10-year debt have risen 38 basis points to 6.15% in the past four weeks.
Flagging demand has plagued two straight auctions. Underwriters were forced to rescue the sale of a 10-year debt on Aug. 14, while a week later an auction of longer-tenor notes saw higher-than-expected cutoff yields.