India’s central bank took a number of unconventional measures to reduce borrowing costs in the economy, as above-target inflation prevents it from lowering the benchmark rate for the time being.
While the Monetary Policy Committee kept the repurchase rate at 4% and maintained its accommodative stance, the Governor of the Reserve Bank of India, Shaktikanta Das, used a generous combination of tools to assure the bond market that the central bank it will keep yields under control despite record government debt. program, and also help banks reduce loan rates.
“It is said that it takes at least two points of view to make a market, but these points of view can be competitive without being combative,” Das said in his speech. “Market participants should take a broader time perspective and display bidding behavior that reflects sensitivity to RBI signals in the conduct of monetary policy and debt management.”
Debt support
Das doubled the size of bond purchases on the open market to Rs 20,000 crore ($ 2.7 billion), offered to buy state debt, and also eased the corporate cash crisis through Rs 1 lakh crore of targeted long-term funds. term available on tap.
The measures were aimed squarely at the bond market, which has been struggling to absorb record debt issuance, as both the central and state governments tried to make up for lost revenue amid the pandemic. Das alluded to further rate cuts to support the economy, which the RBI says will shrink 9.5% in the year through March, the first official forecast since the Covid-19 outbreak in Asia’s third-largest economy.
“This was bond market policy today rather than monetary policy,” said Vijay Sharma, executive vice president of fixed income at PNB Gilts Ltd. Governor Das “has done everything in his control except cut back. rates, to keep interest rates low through bonds. Bullish sentiment will remain. “
Sovereign bonds advanced, with yields on 10-year bonds falling seven basis points to 5.95%, while those of top-rated 10-year corporate bonds fell from 10 to 15 basis points. The rupee was up 0.1% against the dollar.
The decision was the first in a newly formed MPC, which includes three external members that have in the past supported monetary and fiscal stimulus to boost the economy. The previous panel had cut interest rates 115 basis points this year.
Inflation, which is above the upper limit of the 2% -6% RBI target band, is projected to move closer to the 4% midpoint in the first half of 2021, creating room for further easing of the RBI. policies.
RBI’s accommodative stance would be maintained “as long as necessary, at least during the current financial year and next year to reignite growth in a lasting way and mitigate the impact of Covid-19 while ensuring that inflation remains within the range. target in the future. ” Mr Das said.
Details of the liquidity steps:
- Rs 1 lakh crore of specific long-term funds with terms of up to 3 years for banks to invest in corporate bonds and commercial papers
- The RBI had previously allowed banks to hold more government bonds unmarked to the market. The central bank will extend this until March 31, 2022, with conditions
- It will buy bonds issued by state governments as a special case. This tool is typically used for central government debt.
- Banks’ retail credit exposure limit has been raised to Rs 7.5 crore from Rs 5 crore, to ease the cash crisis among individual borrowers and small businesses
With Friday’s measures, the RBI reinforced its position as the one doing the heavy lifting for the economy in the absence of substantial fiscal stimulus from the government of Prime Minister Narendra Modi.
What Bloomberg economists say …
“We anticipate that a combination of an imminent sharp slowdown in inflation and a more dovish MPC will lead the RBI to resume easing in the December monetary review. We expect it to make 100 basis points of rate cuts in four policy meetings, reducing the repurchase rate at 3% for June 2021 “.
– Abhishek Gupta, Indian economist
The economy has slowly recovered as the coronavirus continues to spread rapidly in India, home to the second highest number of virus cases in the world. The Organization for Economic Cooperation and Development forecasts that the economy will contract 10.2% this year, while Goldman Sachs Group Inc. predicts a contraction of 14.8%.
“Today’s RBI announcements have removed uncertainties, including the growth outlook for the year, and have assured the market of continued support” from the central bank, said Rajni Thakur, an economist at RBL Bank Ltd. in Mumbai.
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