Shaktikanta Das Image Credit: Wiki Commons

New Delhi: Sovereign bonds and stocks rallied in India on optimism of a more dovish monetary policy after the government named former bureaucrat Shaktikanta Das as the central bank chief. The rupee weakened amid investor concerns, touching 72.46 to the dollar before recovering slightly to 71.99.

The yield on the benchmark 10-year bonds dropped 12 basis points to 7.41 per cent, sending bonds to their highest levels since April on a closing basis. The S&P BSE Sensex gauge rose 1.8 per cent, led by lenders, including Yes Bank Ltd. and Kotak Mahindra Bank Ltd. The rupee extended Tuesday’s poll-induced losses and was down 0.2 per cent against the dollar.

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Das, who oversaw Prime Minister Narendra Modi’s controversial cash ban program, was named central bank chief late on Tuesday, a day after Governor Urjit Patel’s surprise exit tipped financial markets into a turmoil. Das, who has often advocated rate cuts and been pro-growth during his stint at the ministry, comes in at a time when inflation is trending lower in India amid an easing in food and energy costs.

India’s consumer inflation is likely to have eased to 2.58 per cent in November, the slowest pace of increase since July 2017, according to a Bloomberg survey, as against 3.31 per cent in the prior month. The data is due later Wednesday.

The entrance to the Bombay Stock Exchange. The new RBI governor has often advocated rate cuts and been pro-growth during his stint at finance ministry. Image Credit: Bloomberg

“We are constructive on bond markets primarily on favourable bond supply dynamics and our expectation that lower inflation will lead to a dovish RBI,” said Vivek Rajpal, a rates strategist at Nomura Holding Inc. in Singapore. “Although one cannot say with certainty, it is likely that Das may have a neutral-to-dovish bent on monetary policy.”

Policy rates in India are decided by a monetary policy panel, which includes the governor.

Given his history as former bureaucrat, it does nothing to ally concerns regarding government interference in RBI policy.

- Sue Trinh, Royal Bank of Canada

Inflation is benign at the moment but inflation-targeting will continue to be important for the central bank, Das said in his first briefing after taking over as governor.

The new governor’s comments are “extremely bullish for bonds, provided that other conditions like US yields, crude prices remain well behaved,” said Sandeep Bagla, associate director at Trust Capital Services Pvt. in Mumbai.

Government interference

The reaction in the currency market was less optimistic on concerns about how independent the new governor will be on policy matters. The government wants more control over the RBI’s functions and higher dividends to help finance its deficit, a flashpoint between the authorities and Patel that led to his departure.

“Overseas investors are worried about central bank’s independence, specially after the manner of Patel’s exit,” says Paresh Nayar, Mumbai-based head of currency and money markets at FirstRand Ltd. “State poll losses and Patel’s exit has led foreign investors to sell substantially over the last two sessions.”

Some investors fear that Tuesday’s setback at the state elections may force the government to be more strident in its demand for the RBI to loosen curbs on some of the weakest banks to ensure lending continues ahead of an election next year. Global funds pulled $202 million from rupee bonds on Monday, after investing a net $525 million last week.

“Given his history as former bureaucrat, it does nothing to ally concerns regarding government interference in RBI policy,” said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada. “Add to that Modi’s setback in the state elections and it’s not looking good for the rupee through the start of next year.”