No Surprise From RBI Turns Bond Watchers' Focus to Fiscal Policy

(Bloomberg) -- The Reserve Bank of India's policy decision has come and gone, without really changing much for the local bond market that's grappling with its worst losses since 2013.

The central bank kept interest rates unchanged, made a small tweak to its inflation forecast and didn't really commit to anything on the liquidity-management front. That's set to turn investors' focus toward the government's fiscal policies, given that concern over worsening public finances has also contributed to the bond rout.

“For the rates markets, especially bonds, the key is watching the news around the fiscal policy and commodity prices,” said Vivek Rajpal, a Singapore-based rates strategist at Nomura Holdings Inc. The RBI's policy was “neutral,” he said, adding however that given the comments were less hawkish than market expectations, it is “unlikely to trigger any further selloff.”

Bonds reversed losses after the policy outcome, with the benchmark 10-year yield falling two basis points to 7.04 percent. The yield, which was up one basis point before the decision, has climbed 52 basis points this year.

The RBI policy may have been done with, but the risks of fiscal slippage and subsequently higher market borrowings remain in place. Therefore, as far as bond watchers are concerned, the ball is now in the government's court.

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To contact the reporter on this story: Kartik Goyal in Mumbai at kgoyal@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani, Karthikeyan Sundaram

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