Bond bulls stay cold to new RBI governor

The bond market reacted nervously to the appointment of a perceived inflation hawk Urijit Patel as the next governor of Reserve Bank of India (RBI). The expectations of a rate cut from the architect of the new inflation targeting framework dimmed, pushing up the yields on government bonds by 0.06% to 7.16%, wiping out the gains last week when the yields had hit a low of 7.10%. It needs to be seen whether Patel will withstand the pressure to cut rates to spur growth while ensuring that government sticks to their fiscal deficit target.

The rupee closed at Rs 67.31 to the dollar, about 13 paise higher than the close on Friday. The forex markets did not react to the change of guard at the central bank.

Ananth Narayanan, regional head of financial markets for Asean and South Asia at Standard Chartered Bank, said, "The appointment of Urijit Patel as the next governor signals the continuity of the inflation targeting strategy of the Reserve Bank of India. This in a way also dims the rate-cut hopes which could have resulted in the yields to rise. But today's market movements were non-events as the yields and moved in both directions by an equal measure even last week."

"Foreign investors will be very happy as they now believe that there will be no dilution in the inflation targeting strategy that Raghuram Rajan had laid out in the last three years," Narayan said.

While Patel is described as the chief architect of the report on the monetary policy framework, it must be noted that the new framework also has a lot of imprint of the incumbent governor Raghuram Rajan, who believes that high inflation and high growth cannot co-exist. He was of the view that the RBI's mandate should be to control inflation while ensuring price stability. The new inflation-targeting frame work has a medium-term target of 4% with tolerance for a 2% variance.

Ashutosh Khajuria, executive director, Federal Bank, said, "Markets may have reacted to a lot of global events as the yields on the US Treasuries also rose by 0.06%. By appointing Urjit Patel, the government has selected a candidate who can fit into the large shoes of Raghuram Rajan."

Others had doubts whether the new governor will do anything to go against the government line and may even be a bit dovish so that the pro-growth agenda of the government can be met. A senior economist with a foreign brokerage said, "It needs to seen if the monetary policy will move in tandem with the fiscal deficit target of the government."

He will be taking over at a time when his wings will be clipped on rate decisions as the newly set up six-member Monetary Policy Committee (MPC) will take a call on the rate movement. Three members of this committee will be from outside the RBI appointed by the government.