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RBI signals support to PM Modi’s Budget to aid growth

RBI signals support to PM Modi’s Budget to aid growth

India’s central bank kept interest rates on hold Friday and began withdrawing some pandemic-era policies, while reiterating its intent to keep its stance accommodative to support economic growth.

The Reserve Bank of India emphasized it was seeking to ensure ample liquidity to manage the government’s near-record borrowing and keep rates lower for longer. It also committed to opening up room for more targeted market operations to ensure financial stability, but bonds sold off as the measures fell short of expectations and lacked details.

“The RBI is gradually withdrawing crisis-time policies,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. “But accommodative policy is here to stay and the RBI will act to prevent any sharp spike in yields.”

The central bank messaging comes after Prime Minister Narendra Modi’s government unveiled a budget earlier this week that seeks to borrow 12 trillion rupees (nearly $165 billion) to spend more on creating capital assets and health care.


Friday’s measures include a gradual roll back of a previous 100 basis point cut in cash reserve ratio — the amount of deposits lenders must set aside as reserves — that was announced amid the pandemic. The withdrawal of this broad swathe of cash from the banking system opens up room for the central bank to announce targeted cash injections, Governor Shaktikanta Das signaled in his speech.

Das also announced that a program permitting banks to hold 22% of their debt without marking it to market would be extend by a year, through March 2023. The central bank also extended access for shadow lenders to a special liquidity window for certain stressed sectors, without providing specifics.

“The RBI stands committed to ensure the availability of ample liquidity in the system and thereby foster congenial financial conditions for the recovery to gain traction,” Das said, stopping short of announcing specific measures.


Markets were disappointed by this lack of detail, especially regarding debt purchases through open market operations by the RBI. The yield on benchmark government bonds rose four basis points to 6.12% after climbing as high as eight points. The benchmark S&P BSE Sensex erased gains and were trading little changed. The rupee strengthened 0.1%.

The central bank’s six-member panel voted unanimously to keep the benchmark repurchase rate unchanged at 4% and retain its easy monetary policy stance for as long as is necessary to support growth, Das said.

The Reserve Bank of India, which lowered borrowing costs by 115 basis points last year, has been on pause mode since mid-2020 over inflation worries. Although inflation is currently back in the RBI’s comfort range, higher government spending risks stoking price pressures and and complicates any efforts to resume policy easing.

What Bloomberg Economics Says…
“The hold suggests the RBI is confident this week’s expansionary budget will provide sufficient support to keep the recovery going.”

— Abhishek Gupta, India economist
Retail inflation eased to 4.6% in December, marking the first time in nine months that the headline rate returned within the RBI’s 2%-6% target band. That nudged the RBI to lower its inflation forecast for the current quarter, to 5.2% from 5.8% seen previously.

The RBI also upgraded its growth forecasts. It sees growth in the year starting April at 10.5% from an estimated 7.7% contraction in the current fiscal year. That is a tad lower than the government’s 11% estimate and comes amid early signs of a recovery gaining momentum.

“Monetary policy will continue to complement the expansionary fiscal policy through FY22 given the size of the borrowing program,” said Shubhada Rao, founder at QuantEco Research in Mumbai. “A balancing act may be needed in the second half of the financial year as inflation is likely to creep up.”

In Video: Monetary Policy highlights: RBI restores CRR, allows online access to government securities market

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