Bond vigilantes may undermine economic recovery, unsettle financial markets: RBI paper

The economy is set to come back on track sooner as the even the services sector which was lagging is bouncing back with inflation set to ease after June, according to an assessment of the economy published in RBI’s latest monthly bulletin. But it warns that the vaccinations need to speed up amidst fears of a second wave of the Pandemic rising in India too.

Data suggests that the economy may be back on high growth path and an all around, optimism is taking hold, among households and businesses, investors and markets. “There is a restless urgency in the air in India to resume high growth” said deputy governor Michael Patra and his team of economists in the paper published in the latest monthly bulletin. ” Incoming data point to even contact-intensive services such as personal care, recreation and hospitality gathering traction and pace even as agriculture crosses production highs in various crops and in horticulture, and manufacturing finally shrugs off the vice-like grip of contraction ” .

But the bond market does not seem to be taking positive cues. “Bond vigilantes could, however, undermine the recovery, unsettle financial markets and trigger capital outflows from emerging markets. The Reserve Bank is striving to ensure an orderly evolution of the yield curve, but it takes two to tango and forestall a tandav” said Patra and his team. Evem the central bank’s board in its meeting reviewed the current economic situation, global and domestic challenges and various areas of operations of the Reserve Bank.

In 2021, inflation will likely ease after June, but it will be higher than in prints because of statistical base effects of high inflation a year ago. But inflation has witnessed upside pressures. Headline CPI inflation has moved in a tight range of 5.8 to 6.4 per cent from June, testing the upper tolerance band of the inflation target of 6 per cent. Global oil prices are hardening causing production restraints. “The ratcheting up of input prices to multi-year highs pose a dilemma” said Michael Patra and his team.

As far as India’s preparedness in handling the COVID pandemic curve, India, has 60 per cent of global vaccine manufacturing capacity, launched itself against the pandemic and is partnering with Australia, Japan and the US for the last mile delivery support. More than 70 countries have received vaccines made in India, RBI said.

In comparison with other emerging market peers, it is also likely that India will decouple from other emerging economies for which rising financing costs and rising pile-ups of debt prevent the recovery.