India Central Bank Expands QE as Growth Seen Faltering
India’s central bank expanded its version of quantitative easing and lowered its economic growth forecast as the world’s worst Covid-19 wave sweeps through the nation.
The Reserve Bank of India will buy an additional 1.2 trillion rupees ($16.4 billion) of bonds next quarter under the so-called Government Securities Acquisition Program 2.0, Governor Shaktikanta Das said Friday. The program is aimed at keeping interest rates low at a time when the government plans a near-record borrowing to aid the economy’s recovery.
The central bank lowered its expectation for gross domestic product growth to 9.5% in the current fiscal year, down from 10.5% previously. The Monetary Policy Committee kept the benchmark repurchase rate steady at 4%, as expected by all 44 economists surveyed by Bloomberg.
The six-member committee, which has been in pause mode for more than a year, said it was retaining its accommodative policy for as long as necessary to revive and sustain growth on a durable basis, implying there’s still room to cut rates further.
“At this juncture, policy support from all sides is required to gain the momentum of growth,” Das said.
What Bloomberg Economics Says...
“The RBI is throwing its weight behind the fiscal effort to spur a recovery, motivated by a view that it can’t take interest rates any lower.”
-- Abhishek Gupta, India economist
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The bond-buying program aims to support the administration’s borrowing plan, with the RBI buying sovereign debt to cap yields despite stubborn inflationary expectations. It’s already on course to acquire 1 trillion rupees of bonds in the quarter ending in June, in addition to using steps such as a Federal Reserve-style “Operation Twist” and Targeted Longer-Term Refinancing Operations to maintain ample liquidity.
Sovereign bonds fell, with the yield on benchmark 10-year bond rising by one basis point to 6.01%, while the rupee and stocks were slightly lower.
“Monetary policy hand-eye coordination is getting increasingly complicated,” Nomura Holdings Inc. economist Aurodeep Nandi said. “The timing of the RBI’s ‘policy pivot’ toward normalization will remain crucially contingent” on the vaccination pace, he said.
Recovery in Peril
A recovery in Asia’s third-largest economy is in peril from a resurgent pandemic, which forced several states to impose lockdowns to check the virus spread. The movement and activity curbs are seen fanning inflation and hitting GDP, with many economists already cutting their growth forecasts for this fiscal year to single digits, from double digits previously.
In addition to cutting its growth forecast, the rate panel now sees inflation ending at 5.1% for the year, toward the upper end of its 2%-6% target band.
Friday’s rate decision comes amid concerns that higher input and wholesale costs could feed into consumer prices. The build-up in price pressures is partly due to supply disruptions caused by the pandemic and higher global commodity prices.
The governor also announced a number of measures including:
- On tap liquidity: Banks can borrow as much as 150 billion rupees from this window to lend to Covid-hit sectors such as hotels and the tourism industry. Tenors are as high as three years, with the window open through next March 31
- Foreign Portfolio Investors: Some rules will be eased for these funds
- Regional rural banks will be allowed to raise cash via certificates of deposit
- Support to lender for small businesses: SIDBI, the umbrella lender to small businesses, will have access to a 160-billion rupee special cash window. The window will be open at the repo rate for a year
- Loan resolution: More stressed borrowers like small businesses and individuals are included under this program
Das doubled the amount of debt that banks can restructure for a small borrower to 500 million rupees, to include more distressed businesses. The move comes on the back of its second set of debt-resolution steps announced last month for those hit by the second coronavirus wave.
In May, the RBI announced loan-relief measures for small businesses and pledged to inject nearly $7 billion of liquidity to key sectors to support them through the pandemic.
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