Indias RBI Ramps Up Market Rhetoric as It Boosts Liquidity

Indias central bank Governor Shaktikanta Das ramped up his rhetoric to the bond market and backed those words with actions as he sought to reduce borrowing costs without cutting the benchmark interest rate.

Hamstrung by above-target inflation, the Reserve Bank of India‘s Monetary Policy Committee retained its main repurchase rate at 4% on Friday, in line with economists’ forecasts. It turned to non-interest rate tools, such as bond purchases, to keep yields under control, and lowered banks lending rates to spur consumption.

The RBI has provided the bulk of stimulus to an economy it now sees contracting 9.5% this fiscal year as the coronavirus pandemic continues to surge across the nation. It‘s also had to respond to a bond market that’s struggling to absorb record issuance of debt as both the federal and state governments face revenue losses.

The shifts had the desired effect. Sovereign bonds advanced, with the yield on 10-year bonds falling seven basis points to 5.95%. Yields on top-rated 10-year corporate notes declined 10-to-15 basis points. The rupee rose 0.1% against the dollar.

“This was a bond market policy today rather than the monetary policy,” said Vijay Sharma, executive vice president for fixed-income at PNB Gilts Ltd. Das “has done everything under his control, except cutting rates, to keep interest rates low through the bonds. The bullish sentiment will remain.”

Das addressed part of his comments on Friday directly to market participants, telling them they have a responsibility in helping to control the yield curve. As the governments debt manager, the RBI is wary of a run-up in borrowing costs.

“It is said that it takes at least two views to make a market, but these views can be competitive without being combative,” Das said. “Financial market stability and the orderly evolution of the yield curve are public goods and both market participants and the RBI have a shared responsibility in this regard.”

Read More: RBIs Das Takes Unusual Step of Telling Bond Traders to Behave

Das said the RBI will double the size of open-market bond purchases to 200 billion rupees ($2.7 billion), it will buy state debt, and also ease a corporate cash crunch by providing long-term funds to lenders.

Further details of the liquidity measures:

• RBI to provide 1 trillion rupees of targeted long-term funds with tenors of as much as 3 years for banks to invest in corporate bonds and commercial papers

• RBI had previously allowed banks to hold more government bonds without marking to market. The central bank will extend this until March 31, 2022, with conditions

• Central bank to buy bonds issued by state governments as a special case. This tool is normally used for federal debt

• It raised the limit on banks retail credit exposure to 75 million rupees from 50 million rupees, to ease a cash crunch among individual borrowers and small businesses

On the monetary policy side, the MPC retained its accommodative stance, implying it could resume rate cuts after already easing by 115 basis points earlier this year. The policy decision was the first under a newly constituted MPC, which includes three external members who have in the past supported monetary and fiscal stimulus to boost the economy.

Das said the policy stance would remain accommodative “as long as necessary, at least through the current financial year and into the next year to revive growth on a durable basis” while ensuring inflation is within the target. He forecast that price-growth, which is above the upper limit of the RBIs 2%-6% target band, will ease closer to the 4% midpoint in the first-half of 2021.

What Bloombergs Economists Say

“We forecast a combination of an imminent sharp slowdown in inflation and a more dovish MPC will lead the RBI to resume easing at the December monetary review. We expect it to make 100 basis points of rate cuts over four policy meetings, lowering the repo rate to 3% by June 2021.”

{26}

-- Abhishek Gupta, India economist

{26}

For the full report, click here

{28}

The economy has been slow to recover as the coronavirus 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 it will shrink 10.2% this year, while Goldman Sachs Group Inc. predicts a 14.8% contraction.

{28}

“RBIs announcements today have taken uncertainties away, including that of growth outlook for the year and assured the market of continued support from” the central bank, said Rajni Thakur, an economist at RBL Bank Ltd. in Mumbai.

— With assistance by Tomoko Sato, Vrishti Beniwal, Shwetha Sunil, Unni Krishnan, Jeanette Rodrigues, Kartik Goyal, Suvashree Ghosh, and Divya Patil

(Updates with comments from governor)