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RBI warns against 'bond vigilantes', says they're hampering nascent recovery

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RBI warns against 'bond vigilantes', says they're hampering nascent recovery

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Bond vigilantes is a term used to describe investors who, as a mark of protest against certain monetary policies, engage in an aggressive sale of government bonds.

RBI warns against 'bond vigilantes', says they're hampering nascent recovery
In a strongly-worded report, the Reserve Bank of India (RBI), on Friday, said that “bond vigilantes” are unsettling financial markets, undermining the global recovery, and triggering capital outflows from emerging markets.
Bond vigilantes is a term used to describe investors who, as a mark of protest against certain monetary policies, engage in an aggressive sale of government bonds. This results in driving up the yields.
Urging local investors to aid them in their efforts, the central bank said, “The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestalls a tandav.”
“As countries rush to inoculate their populations, the global economy should regain lost momentum in Q2,” the RBI said in its State of the Economy report for the March bulletin, adding, however, that bond vigilantes were “hampering nascent recovery”.
The report — which has been authored by Deputy Governor Michael Debabrata Patra, among others — also noted that fears over US interest rates had already begun to spill over to emerging market economies (EMEs).
“With the US 10-year benchmark soaring to 1.6 percent from around 1 percent, bond markets in India were pit-roasted by persistent selling and shorting; by March 5, the benchmark in India had touched 6.23 percent, but the Reserve Bank’s announcements of large-sized operation twists soothed frayed nerves and settled the benchmark at around 6.21 percent on March 9. Yields, however, firmed up subsequently on spillovers from the spike in US yields.”
It explained further that investors had begun to withdraw money from EME stocks and bonds. This had created a bump in the smooth passage of inflows trickling in since October 2020.
The report comes at the time when RBI is reaching out to the bond market through various quarters, following a difficult two-month period. But the central bank makes no bones about the fact that they are displeased with bond vigilantes. “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 report reiterated, asking for cooperation.
A similar call was also extended by the RBI in December last year. RBI governor Shaktikanta Das had then urged market participants to take a broader time perspective. Asking them to display bidding behaviour that reflects a sensitivity to the signals from the RBI he had said, “We need to be competitive and not combative.’’
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