India’s RBI Vows Easy Money as Long as Needed to Aid Growth
India's bonds rallied as RBI refrains from announcing steps to soak up excess liquidity.
(Bloomberg) -- India’s central bank pledged to keep its easy money policy for as long as necessary to support the virus-battered economy, while for now leaving borrowing costs unchanged amid stubborn inflation.
The Reserve Bank of India will use a variety of tools to ensure easy financing conditions and market stability, Governor Shaktikanta Das said Friday after a meeting of the Monetary Policy Committee. The panel decided to leave the benchmark repurchase rate steady at 4% -- a decision forecast by all 32 economists surveyed by Bloomberg.
Central banks in the Asia-Pacific have stepped up on stimulus to cushion their economies from the onslaught of the pandemic, including through deeper rate cuts. A resolution to retain an accommodative stance for “as long as necessary” was the closest Indian policy makers got on Friday to providing support for an economy that’s now entered a recession.
A surge in inflation has prevented Das from following through on earlier calls for coordinated policy action in response to the pandemic.
What Bloomberg Economics Says...
“A rise in fuel prices driven by tax hikes, and the RBI’s decision to widen the scope of its liquidity support now pose upside risks to our inflation projections -- and raises the risk the RBI could extend its rate pause until March.”
-- Abhishek Gupta, India economist
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Thirteen Asia-Pacific economies had paused rate cuts between mid-July and end-September, with Australia, Indonesia, and the Philippines resuming policy easing since. Das has instead relied on unorthodox measures to support the economy. He’s used the Federal Reserve-style Operation Twist -- buying long-dated debt while selling short-tenor bonds -- to keep benchmark borrowing costs down, while the central bank’s suspected intervention in the foreign exchange market and subdued demand for loans has kept the banking system flush with cash.
Sovereign bonds advanced as the RBI refrained on Friday from taking steps to soak up that liquidity, which was widely expected by the markets. The yield on five-year bonds declined 10 basis points to 5.03%, while that on the most-traded 5.77% 2030 notes fell three basis points. The rupee gained 0.2%.
“The MPC decided today to maintain status quo on policy rate and continue with the accommodative stance as long as necessary at least during the current financial year and into the next year to revive growth on a durable basis,” Das said.
The accommodative stance is an indication that the central bank sees the possibility of easing interest rates further when inflation cools.
Consumer-price growth at 7.6% in October was well above the upper end of the central bank’s 2%-6% target band and the RBI expects the outlook for inflation to worsen. The central bank sees price gains in the fiscal third quarter at 6.8%.
“Our paramount objective is to support growth while ensuring that financial stability is maintained and preserved at all times,” Das said.
The RBI revised its growth outlook, seeing a milder 7.5% contraction this fiscal year as opposed to its reading in October for a 9.5% decline. That follows a less-than-expected drop in gross domestic product in the three months to September, the second straight quarterly contraction.
Surveys released by the central bank later Friday showed consumer confidence about the current situation picked up from record lows in November, although it was still weak amid a slowdown in the economy, widespread unemployment and uncertainty about wages. Household inflation expectations, however, fell sharply in November from the previous round. The surveys don’t offer reasons.
“These forecasts cement our expectations that the central bank MPC would prefer to settle into a long pause on rates, with a clear intention to anchor policy expectations,” said Radhika Rao, an economist at DBS Group Holdings Ltd. in Singapore.
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