RBI, India’s central bank, is likely to keep interest rates at record lows this week in a three-day meeting of its MPC. In the meeting, the RBI will assess the economic fallout of the country that is recuperating from Covid-19 crisis and the monetary authority is expected to maintain its commitment on liquidity.
There are high chances that the Reserve Bank of India’s (RBI) monetary policy committee (MPC) will most likely keep the repo rate unchanged at 4 per cent and thus will emphatically continue with its accommodative stance. If the repo rate is kept unchanged, it will keep the repo rate at 4 per cent for the sixth meeting straight.
As previously reported, all 51 economists that had been polled by Reuters had expected the MPC to hold the rates, as Asia’s third-largest economy, India, grappled with various state lockdowns.
The RBI has at various instances reiterated that it will continue its accommodative stance and will prioritize growth over inflation targets. RBI has committed itself to ensuring that there is adequate rupee liquidity in the financial system to help the economy’s productive sectors and the government’s massive borrowing program.
Anand Nevatia stated that “The policy outcomes are no longer just a statement of rate action but much more,”.
He added that “While markets will be expecting reassurance on liquidity and awaiting the quantum of GSAP (government securities acquisition programme) for next quarter, one should not be surprised if Governor (Shaktikanta) Das announces yet another innovative tool,”.
Recently in May, India’s central bank had unveiled fresh measures to help lenders tide over mounting bad loans. Thus, the central bank had given borrowers more time to repay their debts, as surging Covid-19 infections had triggered strict lockdowns in several states and had significantly crippled MSMEs.
For its quantitative easing policy, RBI in April had committed itself to buying 1 trillion rupees ($13.71 billion) worth of government bonds from the market. This quantitative easing program that was undertaken in the months of April and may was called G-SAP 1.0.
After G-SAP 1.0, traders will now look forward to see whether the central bank will announce potentially more aggressive bond purchases under a GSAP 2.0 programme on Friday.
The government had recently announced its plans to borrow an additional 1.58 trillion rupees, over and above its massive 12.06 trillion scheduled borrowing for the financial year 2021-22. This will be done in order to compensate state governments for a shortfall in tax revenues.
According to reports, India’s annual economic growth rate had picked up in January-March compared with the previous three months. But given the current state of lockdowns and havoc across the country caused by covid-19, economists are increasingly pessimistic about the June quarter after a huge second wave of Covid-19 infections.
“While the central bank will look to maintain adequate system liquidity, managing the increased supply of sovereign bonds will be a tightrope walk,” Nevatia said.