Bonds in India drop as CPI watchers query food price jump

Benchmark 10-year yields climbed as much as four basis points to 7.4% Tuesday before paring the gains slightly, as consumer-price data, released after market hours Monday, showed January inflation at 6.5%, beating estimates and breaching the central bank’s target ceiling.

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Economists digging into the numbers are questioning a larger-than-usual gap between sub-components of the index — particularly the pace of increase in cereal prices, which have a large weight in the inflation basket — and a higher headline number. Nomura Holdings Inc. sees a possible overestimation of 23 basis points, while Emkay Global Financial Services Ltd. pegs it at 34 basis points.

“Deviations between reported index and estimated index is not uncommon, as it happened in 2020, but market focus on inflation now is much higher given RBI’s policy direction, and as such there is now greater market scrutiny,” said Rahul Bajoria, chief economist of Barclays Bank Plc. “The gap in January is rather large.”

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The doubts come as bond investors try to get a handle on how soon the borrowing costs will peak. The Reserve Bank of India raised its policy rate by 25 basis points last week, but gave no signal that it was done hiking, belying market expectations. The latest confusion also brings back the spotlight on the quality of India’s data which often been questioned in the past.

Different Methodology

The inflation data doesn’t have any discrepancies and “the numbers have been checked and found to be in order,” Deepti Srivastava, deputy director general with the Statistics Ministry, said by email in response to a Bloomberg query. The ministry “is using approved methodology following global standards” for compiling the index, she said.

“Using official data, we find there is a wide divergence between the headline cereal index (top-down) and its subcomponents (bottom-up),” Nomura economists Sonal Varma and Aurodeep Nandi, wrote in a note. “Regardless of the reason, top-down and bottom-up estimates have never been this wide apart.”

The possibility that official data may be overstating the pace of price rises hasn’t given much comfort to bond traders who are awaiting US inflation data that’s likely to show acceleration in January from the previous month.

“For now the damage is done,” said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank, “If the numbers are reworked, it will be after the next CPI print and by then the market will be more concerned about the next print.”