Indian cenbank ensures abundant liquidity even though it holds rates
The Reserve Bank of India (RBI) kept interest rates at record highs on Friday and announced additional bond purchases to support the economic recovery, at risk of being derailed by the devastating second wave of COVID infections -19.
The RBI kept the repo rate (INREPO = ECI), its key lending rate, at 4% and kept the reverse repo rate (INRREP = ECI), the borrowing rate, unchanged at 3.35% as expected in a Reuters poll. Read more
RBI Governor Shaktikanta Das said all six MPC members voted to keep rates unchanged and to maintain an accommodative monetary policy.
“The MPC was of the view that at this point political support from all parties is needed to accelerate the growth that was evident in the second half of 2021 and to nurture the recovery once it takes root,” said said Das.
Das also said the RBI would buy 1.2 trillion rupees ($ 16.44 billion) worth of bonds during the September quarter in addition to its current quantitative easing program called G-SAP 1.0.
Indian financial markets reacted little to the widely anticipated announcement.
India’s annual economic growth rate accelerated in January-March compared to the previous three months.
But economists are increasingly pessimistic about the June quarter after a huge second wave of COVID-19 infections hit the country last month and led the RBI to announce interim measures. Read more
Das said the Monetary Policy Committee forecast GDP growth of 9.5% in fiscal year 2021/22, down from a previous forecast of 10.5%. Retail price inflation is estimated at 5.1% in 2021/2022.
“Their insistence on ignoring rising inflation due to rising commodity and food prices is extremely intriguing and could pose a risk to financial stability at some point,” said the independent adviser and expert on Sandip Sabharwal market.
“The economy may take (a) a phase out of liquidity, but any successive action on liquidity and rates when inflation rises rapidly in the data in a few months will be more disruptive to the economy,” he said. he adds.
The central bank has reduced the repo rate by a total of 115 basis points (bps) since March 2020 to soften the blow of the pandemic.
The RBI pledged in April to buy Rs1 trillion of government bonds on the market between April and May as part of a quantitative easing program it called G-SAP 1.0.
“We will continue to think and act outside the box, planning for the worst and hoping for the best,” said Das. “The need of the hour is not to be overcome by the current situation but to overcome it collectively”.
($ 1 = 72 9950 Indian rupees)
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