March 20, 2021 4:47:37 am
With bond yields rising the world over, the Reserve Bank of India (RBI) has warned against bond vigilantes, stating they could undermine the recovery, unsettle financial markets and trigger capital outflows from emerging markets.
It said the pandemic stirs a heady cocktail — fiscal stimulus, monetary accommodation, release of pent-up demand and vaccine rollout — on which bond vigilantes thrive.
“As growth forecasts for 2021 are ratcheted up, they see in them the spectre of long dormant inflation, the archenemy of bonds as it erodes the real value of the fixed income they provide,” the RBI said in a report on the ‘State of the economy’. “The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav.”
There is a restless urgency in the air in India to resume high growth, with signs that the capex cycle is uncoiling and turning, and earnings results of corporates having beaten market expectations, the RBI said, adding, “inflation has witnessed upside pressures.”
Five developments marked the onset of March, the RBI said. First, calm returned after the flash bond sell-offs globally and in India that heralded the arrival of March, prompting a “calling out of vigilantes who have returned to prowl markets, guns holstered and saddled up,” the RBI said.
In India, the benchmark 10-year yield — which had averaged 5.93 per cent during April 2020 to January 2021 — surged to 6.13 per cent on February 2 on the announcement of the market borrowing programme of the government, reportedly higher than what was expected. Following the announcement of a slew of measures by the Reserve Bank on February 5, however, the benchmark eased to 5.96 per cent by February 11. The yield was 6.19 per cent on Friday.
US bond yields had crossed the 1.6 per cent level recently, raising concern in the world markets.
Nevertheless, forewarned is forearmed: bond vigilantes are riding again, ostensibly trying to enforce law and order on lawless governments and central banks but this time around, they could undermine the economic recovery and unsettle buoyant financial markets, the RBI said. Fears over US interest rates have already started spilling over on to emerging market economies (EMEs), it added.
“With these latent anxieties, bond vigilantes turn sceptical about the central bank’s promise to remain accommodative and start the rout,” the RBI said. The pretext can be country-specific idiosyncratic factors — more than anticipated government borrowing in India although it is less than last year, both gross and net; the return of break-even inflation on the far horizon in the United States (US), but as the Federal Reserve Chairman pointed out, inflation dynamics can change over time but not over a dime, it added.
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