^I think the financial analysts* are trying to create a gloom/doom circular statement so that they can make money on either side of the trades. Least of all Bloomberg's business week.
For example, the latest run in the bond yields is due to inflation fears and slim margin of BJP victory in Gujarat https://www.bloomberg.com/news/articles/2017-12-20/deepest-india-bond-selloff-in-17-years-shows-signs-of-worsening
Now the financial analysts and the bond traders are spooked that RBI cannot be their baby sitter and wipe their a$$e$ whenever they make a loss making trade:
Repeated use of regulatory help “isn’t desirable from the point of view of efficient price discovery” in the bond market and effective market discipline, Viral Acharya, deputy governor of the Reserve Bank of India, said late Monday at a meeting of traders. “Interest-rate risk of banks cannot be managed over and over again by their regulator.”
What exactly do the banks who have invested in Indian sovereign bonds? Here is the problem:
“With relatively high duration and concentration of government securities in investment portfolio, bank earnings and capital remain exposed to adverse yield moves,” Acharya said. Government securities made up about 82 percent of commercial banks’ total investments in the year ended March 2017, and about 84 percent for state-run banks, he said. The exposure “has noticeably increased since 2014,” he said.
In a nutshell, commercial banks and state-run banks have parked >80% of their investments back into GOI securities. So if I am running a bank and I have Rs. 100 to invest and I go and invest Rs. 80 in Government securities (instead of lending it out)** and with bond prices falling and I incur losses on my portfolio then is it right if I do the following?
Lenders including State Bank of India and Central Bank of India have asked the RBI to let them spread the losses incurred on the sovereign debt in the three months ended December over two quarters, the Economic Times newspaper reported on Jan. 4.
Basically if you spilled some raita (yogurt based side dish) on the floor, you are asking RBI to allow you to spread the raita so that your loss appears thinner!
RBI saw through it and indicated, go suck your thumb if you are exposed to government securities and come back to RBI and ask to spread the losses over several quarters. RBI is not going to manage your losses.
“The market is taking it as the RBI may not be willing to go out of the way to help manage the losses,” said Vijay Sharma, executive vice president for fixed income at PNB Gilts Ltd. in New Delhi. “Hence, it’s expected that demand for government securities may take a further beating.”
And then the financial analysts and their cohorts in the Banks who do lazy risk-free investing scream that this will lead to inflation and hence gloom and doom. All because the RBI did not allow them to spread their Raita.
Here is a gloom and doom article: [url]https://www.bloombergquint.com/global-economics/2018/01/12/indias-retail-inflation-rises-at-fastest-pace-in-16-months[/quote]
But the key takeaways:
Consumer food prices went up 4.96 percent over last year compared to a 4.42 percent rise in November.
Prices of pulses and products fell 23.5 percent year-on-year. Prices have softened for the thirteenth straight month.
Fuel and light inflation stood at 7.9 percent compared to 7.92 percent in November.
Housing inflation stood at 8.25 percent, compared to 7.36 percent in November.
Prices of clothing and footwear went up 4.8 percent over last year compared to 4.96 percent in November.
*I do not trust financial analysts. And economists. I may be completely biased, but again I am independent and not beholden to anything.
** I am dumbing it down yes, but again if you understand the core you can do away with the complexity which is generally unnecessary.