(MENAFN- Gulf Times) Bond investors aren't as worried about India's inflation as central bank governor Raghuram Rajan.
Aberdeen Asset Management and the local unit of BlackRock predict the yield on 10-year government debt will fall to 7.50% or below by the end of December from 7.72% as subdued global economic growth caps commodity prices.
That's even as most economists in a Bloomberg survey see Rajan leaving the benchmark rate at 7.25% for the rest of 2015 after yesterday's quarter-point cut.
Rajan said risks to his 6% inflation target were tilted to the upside and his next move will depend on the monsoon. Two hours later, the government said it was making preparations as the crucial June-September rainfall would be lower than it earlier estimated, increasing the odds of a poor harvest and spike in food prices. "I'm confident the government will be able to manage the impact on inflation," Jayesh Mehta, managing director and country treasurer at Bank of America Merrill Lynch in Mumbai, said by phone. "We are also still a long way from a pick-up in investment demand. I won't be bearish on bonds."
Prime Minister Narendra Modi has asked ministries to prepare for a below-average monsoon, Science Minister Harsh Vardhan said yesterday. His administration may be forced to sell part of its grains stock and clamp down on hoarders for a second straight year if the rains prove insufficient. More than half of India's farmlands depend on the monsoon.
Agriculture accounts for about 15% of Asia's third- largest economy. Gross value added € an indicator of strength closely watched by policy makers € will expand 7.6% in the year through March 2016, down from the 7.8% estimated earlier, the central bank said yesterday.
While "a conservative strategy would be to wait" for more certainty on how monsoon rains will affect inflation, weak investment means "a more appropriate stance is to front-load a rate cut," Rajan said in a statement. He cut the repurchase rate by 25 basis points, his third reduction in 2015.
He'll stay put for the rest of the year, according to the median estimate in a Bloomberg survey last month. Government actions to contain food inflation will be key to his next move: Success could lead to more cuts in early 2016, said Yes Bank Ltd's Shubhada Rao, while failure could add as much as 1 percentage point to inflation "in a matter of months," according to Ashish Kumar at Elara Securities Pvt.
"We expect food inflation to remain under control," said Dhawal Dalal, head of fixed income at DSP BlackRock Investment Managers Pvt. Relatively lower global commodity prices will help a proactive government, he said, adding that there's still value at current bond yield levels.
Swaps show traders pared bets for further easing. The cost to lock in borrowing costs for a year climbed six basis points to a two-week high of 7.54%. Australia & New Zealand Banking Group is reviewing its forecast for another 25 basis point reduction in the repo rate in 2015, while Nomura Holdings continues to see a pause until December 2016.
Aberdeen Asset is positive on Indian debt not just because of the government's inflation-fighting capability but also because Modi has made it easier to do business, said Kenneth Akintewe, a fixed-income fund manager.
These steps could boost investment and ease supply constraints, contributing to disinflation going ahead, Rajan told analysts in a teleconference on Tuesday. Moody's Investors Service raised India's rating outlook to positive from stable in April after Standard & Poor's last year removed the risk of a downgrade to junk.
"Within the emerging markets, India is one of the countries with an improving credit outlook," Akintewe said by phone from Singapore. "We look at a more longer-term picture."
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