India’s central bank kept interest rates on hold, while assuring markets of ample liquidity to manage the government’s near-record borrowing.
The Reserve Bank of India (RBI) is to sap some funds from banks by using the cash reserve ratio (CRR) — the amount of deposits that lenders must set aside as a reserve — as a tool and to use the money for more targeted market operations, Governor Shaktikanta Das said yesterday.
The bank’s Monetary Policy Committee separately decided to keep the repurchase rate unchanged at 4 percent.
Photo: Reuters
A previous CRR cut of 100 basis points to boost liquidity to fight the economic fallout of the COVID-19 pandemic is to be rolled back in two phases by May, Das said.
The cash is now to return to the central bank as reserves, allowing the RBI to, in turn, use it for open market operations and other liquidity measures, although Das did not specifically name any such programs.
“The RBI stands committed to ensure the availability of ample liquidity in the system and thereby foster congenial financial conditions for the recovery to gain traction,” Das said, stopping short of announcing specific measures.
Markets were disappointed by this lack of detail, especially regarding debt purchases by the RBI.
The yield on benchmark government bonds rose 5 basis points to 6.12 percent after climbing as high as 8 points.
The benchmark S&P BSE Sensex erased gains and was trading down 0.1 percent. The rupee strengthened 0.1 percent.
“The RBI is gradually withdrawing crisis time policies,” Nirmal Bang Equities Pvt economist Teresa John said. “Accommodative policy is here to stay and the RBI will act to prevent any sharp spike in yields.”
The central bank’s six-member panel also voted to retain its easy monetary policy stance for as long as is necessary to support growth, Das said.
The RBI, which last year lowered borrowing costs by 115 basis points, has been on pause since the middle of last year over inflation worries.
Although inflation is back in the RBI’s comfort range, higher government spending risks stoking price pressures and complicating the central bank’s efforts to resume policy easing.
Retail inflation eased to 4.6 percent in December last year, marking the first time in nine months that the headline rate returned within the RBI’s target band of 2 to 6 percent. That nudged the RBI to lower its inflation forecast — to 5.2 percent in the current quarter from 5.8 percent seen previously.
The RBI also upgraded its growth forecasts. It sees growth in the year starting April at 10.5 percent from an estimated 7.7 percent contraction in the current fiscal year.
That is slightly lower than the government’s 11 percent estimate and comes amid early signs of a recovery gaining momentum.
Indian Minister of Finance Nirmala Sitharaman on Monday unveiled a budget of almost US$500 billion to revive growth hurt by the COVID-19 pandemic.
The plan, which would rely on borrowing 12 trillion rupees (US$165 billion) to spend on healthcare and creating capital assets, would keep the budget deficit at a wider-than-expected 6.8 percent of GDP in fiscal year 2022.
“Monetary policy will continue to complement the expansionary fiscal policy through FY22, given the size of the borrowing program,” QuantEco Research founder Shubhada Rao said. “A balancing act may be needed in the second half of the financial year, as inflation is likely to creep up.”
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