CPI watchers downgrade bonds in India as food prices jump

 

The benchmark 10-year yield climbed four basis points to 7.4% on Tuesday, but pared some of the gains as consumer-price data released after the market closed on Monday showed January inflation at 6.5%, beating estimates. and crossed the target range of the central bank.

The surprise jump in India's retail inflation following the hawkish monetary policy last week is causing much debate and confusion among market watchers.

The benchmark 10-year yield climbed four basis points to 7.4% on Tuesday, but narrowed slightly as consumer-price data, which was released after market hours on Monday, put January inflation at 6.5%. beat estimates and breached the central bank's target range. ,

Economists are questioning a larger-than-usual gap between sub-constituents of the index - especially the pace of rise in cereal prices, which have a large weight in the inflation basket - and a higher headline number. Nomura Holdings Inc. sees a potential premium of 23 basis points, while MK Global Financial Services Ltd pegs it at 34 basis points.

Deviations between the reported index and the predicted index are not uncommon, as was the case in 2020, but given the RBI's policy direction, the market focus on inflation is now much greater, and thus under greater market scrutiny. Is. Barclays Bank Plc. "The difference is bigger in January."



The doubt comes as bond investors try to get a handle on how quickly borrowing costs will peak. The Reserve Bank of India raised its policy rate by 25 basis points last week but gave no indication that the hike has been done, dashing market expectations. The latest confusion highlights again the quality of India's data, which has often been questioned in the past.

different methodology

There is no discrepancy in the inflation data and "the numbers have been checked and found to be correct," Deepti Srivastava, deputy director general of the statistics ministry, said in an email response to a question from Bloomberg. accepted practice that adheres to global standards".

Nomura economists Sonal Verma and Aurodeep Nandy wrote in a note, "Using official data, we find that there is a wide divergence between the headline cereals index (top-down) and its sub-components (bottom-up) " , top-down and bottom-up estimates have never been so widely separated."

The possibility that official data is exaggerating the pace of price increases hasn't brought much comfort to bond traders, who await US inflation data that is likely to show an acceleration in January from last month.

"The damage is done for now," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, adding, "If the numbers are reworked, it will be after the next CPI print and till then the market will be thinking about the next print." would be more concerned. ,