The Reserve Bank of India (RBI) yesterday signaled more policy easing ahead and announced a slew of liquidity steps to support an economy it sees contracting 9.5 percent this fiscal year.
The bank’s monetary policy committee retained the benchmark repurchase rate at 4 percent, as predicted by all 32 economists in a Bloomberg survey, while keeping its policy stance accommodative, implying it could ease again.
RBI Governor Shaktikanta Das also unveiled a number of unconventional measures to boost activity in the economy and ensure the government’s record borrowing program goes through smoothly.
The accommodative stance would remain “as long as necessary, at least through the current financial year and into the next year to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward,” Das said in a video livestream.
The decision was the first under a newly constituted committee, which includes three external members who have in the past supported monetary and fiscal stimulus to boost the economy. The previous committee had cut interest rates by 115 basis points this year.
The governor said that the central bank stands ready to take further measures on liquidity, and announced a range of steps, such as easing a corporate cash crunch through 1 trillion rupees (US$13.7 billion) of targeted long-term funds with tenors of as much as 3 years to banks for investing only in corporate bonds.
RBI had previously allowed banks to hold more government bonds without marking to market, which the central bank is to extend until March 31, 2022, with conditions, it said.
It would also buy bonds issued by state governments as a special case. Usually it contains this tool only to federal debt.
Sovereign bonds have advanced, as yield on 10-year bonds fell 7 basis points to 5.95 percent.
Das outlined new forecasts for economic growth and inflation, providing the central bank’s first official assessment of the damaging effect of the pandemic on Asia’s third-largest economy.
The RBI sees inflation easing close to 4 percent in the fiscal fourth-quarter ending March — the midpoint of its 2 to 6 percent target band. It sees GDP contracting 9.5 percent in fiscal 2021, but a faster rebound is feasible.
The economy has been slow to recover as COVID-19 continues to spread rapidly in India, home to the second-highest number of virus cases in the world.
The Organisation for Economic Co-operation and Development forecasts the economy to shrink 10.2 percent this year, while Goldman Sachs Group Inc predicts a 14.8 percent contraction.
“We suggest that GDP growth may break out of contraction and turn positive by” the fiscal fourth-quarter, Das said.
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