India’s central bank yesterday surprised markets by suspending its version of quantitative easing, signaling the start of tapering COVID-19 pandemic-era stimulus measures as an economic recovery takes hold.
There is no need for further bond-buying, Reserve Bank of India Governor Shaktikanta Das said in an online broadcast, while stressing that the step is not a reversal of its accommodative policy stance.
The bank will be ready to resume purchases if needed, he said.
Bonds were mixed. The yield on the benchmark 10-year bond climbed 4 basis points after Das announced discontinuing the Government Securities Acquisition Programme (GSAP), bucking market expectations for only trimming the size of its asset purchases from 2.2 trillion rupees (US$29.3 billion) in the previous two quarters.
Shorter-maturity debt was little changed after the central bank did not raise the reverse repurchase rate — a tool used to drain excess funds from lenders — as expected by some traders.
Stocks climbed after the six members of the Indian Monetary Policy Committee kept the benchmark repurchase rate at a record low 4 percent, as predicted by all 34 economists in a Bloomberg survey.
The panel voted 5-1 to retain the accommodative stance, Das said.
“When the shore is so close, we don’t want to rock the boat because we realize there is a life, there is a journey beyond the shore,” Das said on balancing liquidity to ensure broader financial stability. “We don’t want surprises, it will be calibrated, it will be an approach of gradualism.”
However, yesterday’s decision represents a surprise for the market that was expecting Das to only scale back bond purchases, while supporting the economy’s durable recovery from the shock induced by the pandemic.
Surplus funds in the banking system is near 9 trillion rupees and presents an upside risk to inflation, which has been above the central bank’s 4 percent medium-term target for most of this year.
The bank will gradually scale up its cash withdrawals to 6 trillion rupees via the 14-day reverse repo and even withdraw cash from the banking system for 28 days if needed, Das said.
“The absence of GSAP has impacted markets negatively, especially at the longer end of the curve,” said Anand Nevatia, fund manager at Trust Mutual Fund. “Inflationary expectations could lead to under-performance of longer maturity bonds.”
Inflation driven by supply shocks and soaring energy costs is nudging central banks across the world to consider dialing back stimulus, with even the US Federal Reserve starting to talk about removing accommodation.
Fed Chair Jerome Powell last month said that tapering could begin as soon as next month and end by the middle of next year.
“We don’t imitate what another central bank is doing,” Das said, adding that domestic circumstances would determine the policy settings. “At the moment, GSAP is not necessary.”
Das also cut the inflation forecast to 5.3 percent for the current financial year from 5.7 percent.
He has said that inflationary pressures were transitory, and the economy needed support from all sides to recover from the pandemic shock.
The Reserve Bank of India retained its growth forecast for the economy at 9.5 percent in the financial year ending March.
A near-normal monsoon, strong export performance and easing of localized lockdowns are all likely to help India bridge a yawning output gap and considerable slack in the manufacturing sector.
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