RBI balm prompts bond market to dress up war wound

MUMBAI: Even as an American attack on Iraq is due within hours, debt fund managers across the globe, including India, have discounted a market crash, as they feel a substantial war premium has already been factored into the market.
Government security yields have built in around 40-50 basis points already, primarily due to war tensions, and fund managers don’t expect any panic-selling by investors in the event of a full-fledged war.
Moreover, the Reserve Bank of India (RBI) has assured that it will intervene in the market as and when required to stabilise prices. This has boosted the comfort levels of market players, said analysts. They added that fund managers are refraining from hiking their cash exposure in income schemes,which is the usual investment strategy during uncertain times like these.
However, in the past two months, income schemes across the board have reduced the average maturity of their holdings to cut losses in the event of a market crash.
“We don’t expect the war to be a longdrawn-out affair, and the market has already discounted this eventuality. The key concern is oil prices, which can adversely impact inflation, exchange rates, and thereby interest rates. These tensions have been arrested for now, with oil prices sliding on Tuesday,’’ said Rajiv Anand of Standard Chartered Mutual.
The 10-year benchmark government paper, which was quoting at 5.91 per cent after the Budget was presented, has gained around 50 basis points to close at 6.45 per cent on Tuesday.
“Yields have been rising as a result of various developments, including large-scale year-end redemptions by banks along with the Iraq crisis. But investors are quite confident that there will not be a market crash, and therefore no large-scale redemptions,’’ said a fund manager.