Indian Situation Continues To Deteriorate

The situation in India continues to deteriorate.

First, yields are spiking:

A surge in Indian sovereign debt costs to a 12-year high this week is threatening Prime Minister Manmohan Singh’s plan to cut the budget deficit and fueling the fastest surge in credit risk since 2008. 

Ten-year (GIND10YR) yields rose 72 basis points this month through yesterday to 8.92 percent, the most among 14 regional markets tracked by Bloomberg, touched the highest level since 2001 of 9.48 percent. They plunged 57 basis points today after the Reserve Bank of India said late yesterday it will buy long-dated notes via open-market auctions. Government debt in Indonesia added 68 basis points to 8.39 percent.

In response, the Reserve Bank of India has gone into the market to buy bonds with the intended effect of lowering yields:

Late on Tuesday night the RBI announced that it would purchase Rs80bn ($1.2bn) of long-dated government bonds, along with other measures to ease pressures on banks, whose valuations have been badly hit by a series of measures introduced to protect the rupee over the past month.

The moves partially reversed previous tightening measures and led to accusations from analysts of policy “flip-flops”.

These moves have led to questions about the overall veracity of the RBIs policies:

However, the latest move followed a series of other minor interventions, including steps to tighten controls on domestic capital controls last week and further open market interventions to support the rupee on Tuesday, leading to doubts about the RBI’s overall approach.

“Over in India, flip-flops by policy makers continue,” Rajeev Malik, senior Asia-Pacific economist at brokerage CLSA, wrote in a note. “The latest moves by the RBI are aimed at cleaning up the unintended mess in the bond market from their convoluted and ineffective currency defence. But they still appear unsure of what [growth, rupee, bonds] they want to eventually save.”