BUZZ COMMENT-RBI Dilemma: Calming the Bond Market or Fighting Inflation

Feb 9 (Reuters) – The Reserve Bank of India faces a deft juggle as it tries to calm bond traders struggling with runaway yields while maintaining its inflation-fighting credentials by signaling a start standardization of policies.

The RBI is expected to raise the reverse repo rate to 3.55% from 3.35% while keeping its repo rate stable at 4% in a three-day policy meeting ending Thursday, according to a poll Reuters from economists

India’s retail inflation hit a five-month high of 5.59% in December from a year earlier, uncomfortably close to the top of the RBI’s 2% to 6% target. Stimulus measures from the very large government budget for the financial year 2022/23 will only drive it up read more .

As a result, the central bank will be forced to shift from its particularly accommodative and pro-growth stance to a mode of fighting inflation.

This will drive Indian bond yields even higher after a 50 basis point rise in the 10-year yield this year, fueled by the government’s massive borrowing plan to fund its budget from April.

The RBI must deftly manage yields as it did on Tuesday by scrapping a weekly debt sale and also resorting to heavy bond purchases to facilitate government borrowing, while taking a measured stance towards policy normalization .

USD/INR should consolidate in a wide range of 73.75-80 to 75.40-50; selling rallies to the highs is preferable.

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Krishna Kumar is a market analyst at Reuters. The opinions expressed are his own. Editing by Sonali Desai

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