The Reserve Bank of India (RBI) yesterday signaled a shift in policy focus, as it ramped up efforts to mop up excess liquidity in the banking system and raised its inflation forecasts, sending bond yields higher.
While the Indian central bank’s rate-setting panel decided to hold rates and keep its accommodative stance, it also voted unanimously to focus on “withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.”
RBI Governor Shaktikanta Das also announced a new tool to enable the monetary authority to soak up excess cash in the banking system by narrowing the so-called interest rate corridor.
Photo: Bloomberg
The statement dropped a pledge to keep policy loose “as long as necessary” for the first time since late 2019. Combined with increased efforts to tighten liquidity, economists said it marked a hawkish shift in the policy outlook.
“The RBI has undertaken a normalization of the corridor effectively, and is preparing the ground for further normalization in coming months,” Barclays PLC economist Rahul Bajoria said.
India’s 10-year bond yield rose to 7 percent, the highest since 2019, as the RBI also raised its inflation and lowered its economic growth forecast.
“The Reserve Bank of India held its policy rate steady, but indicated it is now focused on withdrawing accommodation. Changes to its forward guidance dialed back its dovish tone,” Indian economist Abhishek Gupta said. It is “an incremental step toward tightening that we expect [until] early next year.”
A recovery in Asia’s third-
largest economy is facing fresh challenges from the war in Ukraine and COVID-19 lockdowns in China, which risk exacerbating a global supply squeeze and price pressures.
Das said the global economy is seeing “tectonic shifts” from the war, and extreme volatility in commodity and financial markets.
“Caught in the cross current of multiple headwinds, our approach needs to be cautious but proactive in mitigating the adverse impact on India’s growth, inflation and financial conditions,” Das said.
The decision comes as many central bank peers pivot toward tightening, led by the US Federal Reserve, which is expected to continue raising rates when it meets next month.
Policymakers globally have begun shifting their focus toward fighting inflation, as recoveries from the COVID-19 pandemic begin to take hold.
A key announcement in the policy statement was the introduction of a new tool to soak up excess liquidity. The so-called Standing Deposit Facility will absorb cash from banks at 3.75 percent, with the central bank not having to provide any collateral in exchange.
The new mechanism, which was first proposed in 2014, now forms the floor of the interest rate corridor, pushing up overnight rates without any direct tightening of policy. Earlier, the floor was the reverse repo rate, at 3.35 percent.
The RBI raised its inflation forecast to 5.7 percent for the fiscal year that started on Friday last week, up from 4.5 percent in February.
It also predicted GDP growth of 7.2 percent for this fiscal year, compared with its previous forecast of 7.8 percent.
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