From exporters to bond traders, RBI facing increasing calls to step in

By Subhadip Sircar

 

From exporters battered by punitive US tariffs to bank treasuries unnerved by bond vigilantes, India’s central bank is facing increasing calls to intervene to help stem losses.

 

It’s a familiar pattern: when local or global forces threaten market equilibrium, the Reserve Bank of India is typically expected to step in. Earlier this year, the RBI snapped up bonds aggressively to shore up credit growth. Yet in recent weeks, no tangible steps have been announced, even as sovereign bond yields spiked to a five-month high in late August. 

 

“It’s hard to know whether the authorities should come in to stabilise the market or not, as the threshold for pain is different under each Governor,” said Nathan Sribalasundaram, a rates strategist at Nomura Holdings Inc. “This Governor has taken a more relaxed approach, especially with regard to FX.”  

 

A spokesperson for the Reserve Bank of India did not respond to an email request for comment.

 

President Donald Trump’s 50 per cent levy on Indian exports has stoked concerns over trade competitiveness, job losses, and economic growth. The tariff could cut India’s gross domestic product by 0.5 per cent to 0.6 per cent this year, Chief Economic Adviser V. Anantha Nageswaran warned on Monday.

 

The government has already cut consumption taxes, sacrificing ₹48,000 crore ($5.4 billion) in revenue, and is preparing a package for exporters. But these steps have fueled worries about the strain on public finances amid slowing tax collections.

 

Benchmark yields surged to a five-month high of 6.66 per cent late August before easing slightly, as banks urged the RBI to reduce the supply of long-dated bonds amid waning demand from insurers and pension funds. 

 

Weaker Rupee 

With the bond market under strain, attention is also turning to the rupee.

 

For now, allowing the rupee to weaken can help exporters offset tariff losses — a strategy China has used before. The Indian currency has fallen about 3 per cent versus the dollar this year in Asia’s worst performance. By some measure, it is now fairly valued or slightly undervalued as per a gauge of competitiveness against peers, according to IDFC First Bank Ltd. 

 

“Exchange depreciation is the only tool in the near term to deal with high bilateral tariffs,” said Gaura Sen Gupta, chief economist at the lender.

 

Meanwhile, exporters have asked the central bank to allow them to convert US proceeds at more favorable exchange rates, Bloomberg News reported last week. 

 

Still, not everyone sees scope for intervention. “With price pressures likely to re-emerge, any overt support to the bond market risks being interpreted as a policy misstep,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. 

 

Finance Minister Nirmala Sitharaman underscored the challenge Friday evening, saying that high yields are not “affordable” at a time of low interest rates. 

 

According to Nomura Holdings, the RBI’s options include intervening via secondary-market purchases or rejecting bids at weekly bond auctions.