Indian bonds and currency fell yesterday as investors took the appointment of Urjit Patel as the next governor of the Reserve Bank of India as a signal of policy continuity at the central bank, making a near term cut in interest rates unlikely.
The benchmark 10-year bond yield rose 4 basis points to 7.14%, while the rupee fell to a near one-month low of 67.17/67.18 to the dollar, compared with its close of 67.07.
Patel, currently an RBI deputy governor, had been seen as among the more hawkish candidates that had been in the running to take over from Raghuram Rajan, who steps down as governor on September 4.
Traders expect Patel to keep the repo rate on hold at the RBI’s next policy review on October 4 after inflation accelerated to 6.07% in July, above the RBI’s near-term target of 5%.
The RBI had cut the policy repo rate by 150 bps from January 2015 to April this year but has held them steady since then.
During his time as deputy governor, Patel had headed a panel that recommended landmark changes to monetary policy in India, including a switch to inflation-targeting and the creation of a committee to set interest rates.
The RBI cut interest rates 150 bps during Rajan’s tenure and the central bank’s pledge to ease cash conditions had also contributed to a rally in bond markets, and investors will be encouraged that one of Rajan’s closest aides will succeed him.
“All investors, both foreign and domestic should take comfort in the fact that there will be policy continuity,” said Kenneth Akintewe, Senior Investment Manager at Aberdeen Asset Management Asia Ltd in Singapore.
“Nevertheless, some of the dovish sentiment that had crept into the market will likely be re-priced given that Dr Patel is viewed as being more hawkish, therefore yields could correct slightly higher in the near term.”
The 10-year bond yield slumped 36 bps, and hit a seven-year low of 7.07% earlier this month as some buyers speculated that a more dovish governor would emerge, and there was also strong buying by foreign investors, though that cooled this month.
Prime Minister Narendra Modi’s government this month formally agreed to adopt Rajan’s inflation target of 2 to 6% in the medium term.
Analysts said they expect Patel, like Rajan, would steer policy towards keeping inflation at the midpoint of 4%, instead of the upper end of the range.
Still, analysts, say they still see scope for an interest rate cut at the end of this year or early in 2017 should food prices moderate in coming months as monsoon rains have been above average.