It’s been three decades since the great 1991 reforms. On July 1 and July 3, 1991, India devalued the rupees by a total of 20 percent and then started to create an exchange rate and a bond market. But on its anniversary, on Friday, no trade was reported in benchmark 2030 bond. Indeed, only two bonds reported more than 10 trades. R Sivakumar, Head of Fixed Income at Axis Mutual Fund, discussed why volumes in the bond market have collapsed and its wider impact.
“We are seeing inflation pickup but that is not just the India phenomenon, that is a global phenomenon with rising inflation expectations,” he said.
“From the monetary policy perspective, Reserve Bank of India (RBI) has been doing these programmes such as government securities acquisition programmes (G-SAP) and that is what is keeping the volatility on markets low on the G-Sec side. So, RBI is trying to support the economy. They do understand the risk coming out of inflation,” he said.
He believes, the RBI is playing a little bit to its strength. “Especially on the fact that we have high reserves, the fact that the current account is close to balance gives them a lot of comfort to do more monetary policy interventions than before,” he explained.
“Over the last few days, the activity in the market is low and particularly for the benchmark 10-year. This is usually the most traded security and it provides an anchor for the rest of the yield curve and the rest of the market in terms of interest rate expectations. So, the fact that the 10-year benchmark has stopped trading is quite surprising,” he shared.
Trading has shifted to other securities in the market instead of benchmark 10-year, he added.
“If you look at the actual cost of borrowing for most corporates, I would argue that over the last few months, they have come down. So corporate bond market has not been so affected,” he said.
“When we look at from the economic perspective, from the cost of capital perspective, we, unfortunately, can no longer rely on the 10-year benchmark but we must look at the five-year or other securities,” he shared.
For the full interview, watch the accompanying video.