Mr Bond Markets marks its presence over Mr Equity Markets in India…

Another nice piece by Niranjan Rajadhyaksha.

He says how India’s sovereign bond market has managed to mark its presence by showing like/dislike for any policy. And more importantly, government taking note which so far has only focused on equity markets:

The dormant Indian bond market seems to have suddenly sprung into action. Economist Ajay Shah had once wonderfully compared it to a Potemkin village, with computer screens displayed to ignorant visitors. There was very little activity behind the impressive paraphernalia of the trading rooms. Has this changed?

Look at what has happened in recent weeks. The Narendra Modi government said in the last week of December that it would need to borrow an extra Rs50,000 crore to fund the fiscal deficit because revenue was lower than expected. Bond yields shot up by 18 basis points in response.

The government went back to the drawing board. It came back a few days later with a lower target of Rs20,000 crore of extra borrowing. The bond market gave a thumbs up. Bond yields fell by 16 basis points.

It is perhaps too ambitious to say that the bond market actually managed to push back against the might of the Indian government. But there is no doubt that it made its voice heard. Meanwhile, monetary policy makers have also had to keep an eye on what the bond market was saying. The yield curve—or more specifically the difference between the repo rate and the interest rate on the benchmark 10-year sovereign bond—has steepened on expectations of higher inflation. JP Morgan economist Sajjid Chinoy wrote in this newspaper in January that this is the steepest yield curve in the past seven years, other than periods of crisis.

Just as it is too ambitious to say that bond market vigilantes forced the government to change its fiscal plan, so it is premature to claim that it has led rather than followed monetary policy. However, the recent episodes do show that the Indian bond market could be gradually coming into its own, and this is potentially a profound shift away from the financial repression that has been a hallmark of the Indian economic policy framework.


The bond market has usually been totally overshadowed by the equities market as a gauge of the economic mood. That could be changing—if what has happened over the past weeks is any indication.

Well, actually this is not really new. Bond markets have always expressed like/dislike for government decisions/policies. May be the attention on them is the new thing…


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