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RBI’s New Measures To Support Financial Markets And Banks

The central bank last month lowered interest rates in an emergency meeting and announced $50 billion of liquidity injections.

Reserve Bank of India Governor Shaktikanta Das laid the ground for more interest rate cuts as he took a number of steps to boost liquidity and support lenders amid a nationwide lockdown that’s brought the economy to a virtual standstill.

Mr Das kept the benchmark repurchase rate unchanged at 4.4 per cent on Friday, but signaled that inflation will ease to below the central bank’s mid-term target of 4 per cent, providing policy room to address risks. That space “needs to be used effectively and in time,” he said in a livestreamed address.

Mr Das has previously pledged to do “whatever it takes” to support the economy, which is seen heading for its first full-year contraction in four decades after a nationwide lockdown for almost all of the nation’s 1.3 billion people was extended to 40 days. The government’s stimulus measures have so far been limited, with growing calls from businesses for authorities to do more to support them as job losses mount.

“More rate cuts look to be on the cards, given the RBI’s view that inflation is set to head below their target,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group in Singapore. “Ultimately though, monetary policy and liquidity provisions can only do so much in the current crisis.”

Mr Das announced a series of measures to support financial markets and banks:

  • Reverse repurchase rate lowered by 25 basis points to 3.75 per cent — to discourage banks from parking cash with the RBI and instead lend to the economy
  • Injection of Rs 50,000 crore ($6.5 billion) into the corporate bond market in a new round of targeted long-term repo operations. At least half of the funds made available to banks through the facility should go to lower rate firms, including shadow lenders and micro-financial institutions
  • Bad-loan rules for banks eased and lenders told to freeze dividend payments

The moves weren’t as strong as some market participants had expected, with bonds giving up some of their gains after Mr Das’s comments.

“I don’t see anything far aggressive in terms of bond purchases,” said Prakash Sakpal, an economist at ING Groep NV in Singapore. “Rs 50,000 crore together with Rs 1 lakh crore announced on March 27 works up to less than 1 per cent of GDP. So, any relief to market will likely be transitory.”

The central bank last month lowered interest rates in an emergency meeting and announced $50 billion of liquidity injections.

What Bloomberg’s Economists Say

The central bank once again maintained silence on the need for it to underwrite government debt to create more fiscal room for the central and state governments, whose deficits are likely to blow out due the impact of the pandemic.

Abhishek Gupta, India economist

Inflation came in at 5.9 per cent in March and is expected to ease as the lockdown puts a lid on all non-essential consumption.

“Inflation could recede even further, barring supply disruption shocks and may even settle well below the target of 4 per cent by the second half of 2020-21,” Mr Das said Friday. “Such an outlook would make policy space available to address the intensification of risks to growth and financial stability brought on by Covid-19.”

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