The Reserve Bank of India (RBI) on Friday went all out to ensure money remains affordable for governments, corporate borrowers and individuals. Disregarding the elevated inflation, the central bank pushed for growth, rolling out measures that make it easier for banks and other lenders to give both corporate and retail loans.
The moves to hold bigger auctions for open market operations (OMO), special OMOs for state governments and easier terms for bank’s bond portfolios saw the yield on the benchmark fall 8 basis points to 5.939%; dealers said the yields on corporate bonds also fell. An on-tap TLTRO for Rs 1 lakh crore, at cheap rates, to enable banks to deploy funds in corporate bonds, CPs, NCDs and even bank loans should help lower lending rates. There was relief for small borrowers with the threshold exposure level being raised to Rs 7.5 lakh crore from Rs 5 crore.
In a reassuring statement, governor Shaktikanta Das said the central bank would “continue with the accommodative stance as long as necessary – at least during the current financial year and into the next financial year”. The moves come as a shot in the arm for the incipient recovery in the economy; the RBI expects GDP to contract by 9.5% in FY21 before clocking a 10.5% growth in FY22. Das expects a “three-speed recovery”, with pandemic-resilient sectors – like agriculture, FMCG, auto, drugs and electricity – recovering faster, followed by recovery in “strike form” sectors, where the activity normalisation is more gradual, and trailed by contact intensive “slog overs” sectors that are hit the most due to the social distancing.
“Overall, a combination of clear, dovish forward guidance, liquidity commitments and bond-supportive measures will ensure policy transmission across markets (money, bonds, bank lending), despite unchanged policy rates. In our base case, we continue to expect a cumulative 50bp of policy rate cuts, distributed across the December and February policy meetings,” said Sonal Varma, chief economist at Nomura. While some economists voiced concerns the ‘accommodative’ policy could be risky at a time when inflationary pressures are strong, others believe it is supply-side constraints that are keeping prices high and that inflation will ease towards Q1FY22.