RBI chief’s credibility on inflation wins over skeptics

MUMBAI: Whatever India’s central bank governor does with monetary policy on Tuesday, global investors look likely to give him the benefit of the doubt.
Overseas funds poured a record $26.9 billion into rupee-denominated debt in the fiscal year ended March 31, data compiled by Bloomberg show.
BNP Paribas Wealth Management credits Raghuram Rajan with lowering inflation expectations, while UBS Global Asset Management says the Reserve Bank of India has built more credibility under him.
JPMorgan Asset Management lauds Rajan for curbing swings in India’s currency.
Since taking office in September 2013, Rajan has won investors’ trust by leading the rupee’s turnaround from unprecedented lows, slowing what was then Asia’s fastest consumer inflation and building record foreign reserves to shield local markets from external shocks.
The former International Monetary Fund chief economist cut benchmark interest rates twice this year, adding to the allure of bonds.
“The central bank under Rajan has built in a lot of confidence among investors and his presence has been a very big positive for Indian markets,” Nandkumar Surti, CEO at the local unit of JPMorgan Asset in Mumbai, said in a recent phone interview.
“If you can reasonably look at the inflation trajectory going forward, you can also possibly look into what the central bank’s action will be. For Tuesday, there’s a 50-50 probability of a rate cut.”
While 19 of 24 economists surveyed by Bloomberg expect Rajan to leave the repurchase rate unchanged at 7.50 percent, five expect a cut to 7.25 percent, adding to similar reductions in January and March.
Rajan started easing policy as plunging crude oil prices improved the nation’s trade balance and slowed consumer-price gains to 5.37 percent in February from as high as 8.60 percent in January 2014.
He was also encouraged by the government’s resolve to narrow the fiscal deficit to an eight-year low.
“Declining inflation, improved current account, stable-to- improving fiscal deficit provide a better picture than previously,” Ashley Perrott, the Singapore-based head of pan- Asia fixed income at UBS Global Asset, said in a April 1 phone interview. “Also, the RBI has built pretty solid credibility.”
He is overweight on Indian government bonds.
Global funds added $6.8 billion to their holdings of Indian debt in the January-March period, the second-best on record. Sovereign bonds capped a fifth quarterly advance on March 31, with the 10-year yield dropping 12 basis points, or 0.12 percentage point, to 7.74 percent. The rupee gained 0.9 percent in the period to 62.4975 a dollar, ending three quarters of losses.
The yield fell three basis points to 7.71 percent as of 9:30 a.m. in Mumbai on Monday, the lowest since March 5, while the rupee gained 0.5 percent to 62.2050 a dollar. Local debt and currency markets were shut April 1-3.
The rupee has rebounded 10 percent from a record low of 68.8450 in August 2013 as Rajan took steps to boost the supply of dollars, including a concessional currency-swap facility for banks, and raised the benchmark rate three times to rein in inflation. India’s foreign-exchange reserves climbed to an unprecedented $341 billion as of March 27.
Rajan also got India’s government to formally agree on an inflation target with the central bank this year, the biggest revamp of the RBI’s mandate in its 80-year history.
“Because of a clear and more credible central bank, inflation expectations in India are coming down for the first time in a long time,” Stefan Hofer, chief investment strategist in Asia for BNP Paribas Wealth, a private bank with the equivalent of $335 billion in assets at the end of 2014, said at a March 25 briefing in Hong Kong.
He sees a further 25 to 50 basis-point reduction in the benchmark rate in 2015 and predicts rupee will strengthen to 60 a dollar in 12 months.
An increase in US borrowing costs poses a risk to capital flows into India and will limit the RBI’s room to cut rates this year, Raj Kothari, a fixed-income trader at Sun Global Investments Ltd. in London, said in a March 31 phone interview.
The rupee’s plunge to a record in 2013 was triggered by capital outflows in the wake of the Federal Reserve’s signal to end its unprecedented monetary stimulus.
IMF chief Christine Lagarde said March 17 a strengthening dollar and normalization of US monetary policy pose a challenge for India’s economy. The Fed last month indicated it will raise borrowing costs at a relatively slow pace.
India’s foreign-exchange reserves and fiscal position make it better prepared for the Fed, Rajan said March 18.
Bond risk in India has declined in the last 12 months.
Credit-default swaps insuring the notes of State Bank of India, a proxy for the sovereign, against non-payment for five years slumped 66 basis points in the period to 156 as of March 31, according to data provider CMA.
“We continue to stay with our overall positive view on rupee-denominated government bonds and credit,” Neeraj Seth, the Singapore-based head of the Asian credit team of BlackRock Inc., the world’s largest asset manager, said in an April 2 interview.
“We believe that the RBI’s monetary policy will be guided by inflation data and trajectory in India over the coming months and quarters, with potential for one or two more cuts in rest of the year.”