A continuous rise in bond yields has rattled the government. It fears a potential increase in overall interest rates in the economy. According to a Reuters report, the finance ministry will raise its concerns about a sharp rise in bond yields when it holds a meeting this week with the Reserve Bank of India to discuss the government borrowing plans for the year.
Separately, economic affairs secretary Subhash Chandra Garg said the government might cancel the upcoming auction on Friday if yields remained high. Meanwhile, the Reserve Bank of India (RBI) is slated to announce its sixth bi-monthly monetary policy on Wednesday and is expected to maintain a pause with a hawkish stance. According to economists, the central bank may also announce some confidence building measures to soothe the bond market.
At the same time, rising yields and falling equities have bought back the debate on bonds and gold as safe haven assets. In global markets, gold moved up more than $10 per ounce on Monday. On domestic front, MCX gold opened Rs 420 higher at Rs 30,714 per 10 gm from the previous day’s close of Rs 30,293.
In the spot market, gold gained Rs 330 and touched Rs 31,600 per 10 gm. Vidya Bala, head of mutual fund research at Fundsindia.com, said, “It’s a global selloff on fear of rising inflation in the US than a rate hike. In India, these are not the issues. For the third quarter, Indian companies reported robust earnings growth of 25 per cent compared to last year. This kind of global selloff offers opportunities for investors to get into the stock market at lower prices.”
“Also, you cannot be using debt instead of equity and you can only use it in addition to equity. Locally, the fundamentals are improving rather deteriorating. So, the local yields will move up making income accrual funds more attractive here. As for gold, there is no fundamental change and we are not seeing a financial market risk here,” Bala added.
A survey by the London Bullion Market Association analysts find that gold can move in a wide range in 2018 and on the upside it even move up to $1,500 levels. “In the immediate short term, if gold closes above $1,350, the metal can move up to $1,380. In the medium term, gold can touch $1,400 and even $1,500 levels,” said Himanshu Gupta, chief market strategist, Karvy Comtrade. Despite rate hike, the real interest rates will remain low if inflation rises. Gold being an inflation-hedge the prospects of yellow metal prices moving up is high,” he added.
“In the Indian futures market, present technical structure suggests a possible recovery move towards the upside view of Rs 30,620/780 sooner or later,” found Geojit Financial Services.
“Long term investors should look at their asset allocation and see if it’s in line with their risk profile and investment horizon. If you are underexposed in equities you could look at investing in them through SIP or STP route. Similarly if you are over exposed to bonds, you could increase your equity allocation in a staggered way,” said Dhaval Kapadia, director, portfolio Specialist, Morningstar Investment Adviser India.
The bullion market has been watching the equity markets for some time as many of the global indices had been on record high levels. The movement of investor money to the equity markets has been one of the reasons why gold has remained subdued.
A reversal of the situation has favoured safe haven buying in gold.
The bond story: Bond yields are hardening globally sending panic waves across global equity markets. The global economy has been on a recovery path. With the US Federal Reserve in the midst of rate hike cycle; the European Central Bank is moving closer to taper its quantitative easing. This has led to rise in yields of developed economies.
“While a RBI OMO announcement on Wednesday (RBI monetary policy) will cool sentiment, it is no longer required from a liquidity perspective. Still, we expect the RBI/MoF to come out with confidence building measures eg, FPI limit hike - to persuade investors to buy G-secs that are increasingly seen as a falling knife. In sum, open mouth operations will be as important as open market operations (OMO) on Wednesday,” said Indranil Sen Gupta, India economist at Bank of America Merrill Lynch.
The G-Sec rates have increased sharply since the December monetary policy with the 10-year benchmark increasing from 7.06 per cent to 7.56 per cent. This has been driven by a combination of factors.
First, the RBI had signalled that inflation was going to be a concern which the market interpreted as being an indication that there will be no rate cut for the financial year. Second, the government announced an increase in its borrowing programme towards the end of December which indicated fiscal slippage.
Further, the CPI inflation number came in at all year-high which buttressed the feeling that there could be a rate hike instead of a rate cut during calendar 2018. Last, the budget has revealed a higher fiscal deficit ratio of 3.5 per cent for FY18 and the target for FY19 at 3.3 per cent is still above the ideal 3 per cent number that was spoken of in last year’s budget.