India Central Bank Expands QE as Growth Seen Faltering

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India Central Bank Expands QE as Growth Seen Faltering

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Anirban Nag
·3 min read
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India’s central bank expanded its version of quantitative easing to keep borrowing costs anchored, as economic growth is seen faltering because of a resurgent Covid-19 wave.

The Reserve Bank of India will buy an additional 1.2 trillion rupees ($16.4 billion) of bonds under the so-called Government Securities Acquisition Program 2.0, Governor Shaktikanta Das said in an online broadcast Friday. The program is aimed at keeping government borrowing costs anchored to ensure it can aid an economic recovery.

The central bank lowered its expectation for gross domestic product growth to 9.5% in the current fiscal year, down from 10.5% previously. The Monetary Policy Committee kept the benchmark repurchase rate steady at 4%, as expected by all 44 economists surveyed by Bloomberg.

The six-member committee, which has been in pause mode for more than a year, said it was retaining its accommodative policy for as long as necessary to revive and sustain growth on a durable basis, signaling there’s still room to cut rates further.

“At this juncture, policy support from all sides is required to gain the momentum of growth,” Das said.

The RBI’s bond-buying program aims to support the administration’s borrowing plan, with the central bank buying sovereign debt to cap yields. It’s already on course to acquire 1 trillion rupees of bonds in the quarter ending in June.

Sovereign bonds fell, with the yield on benchmark 10-year bond rising by one basis point to 6.01%, while the rupee and stocks were slightly lower.

Recovery in Peril

A recovery in Asia’s third-largest economy is in peril from a resurgent pandemic, which forced several states to impose lockdowns to check the virus spread. The movement and activity curbs are seen fanning inflation and hitting GDP, with many economists already cutting their growth forecasts for this fiscal year to single digits, from double digits previously.

In addition to cutting its growth forecast, the rate panel now sees inflation ending at 5.1% for the year, toward the upper end of its 2%-6% target band.

Friday’s rate decision comes amid concerns that higher input and wholesale costs could feed into consumer prices. The build-up in price pressures is partly due to supply disruptions caused by the pandemic and higher global commodity prices.

The governor also announced a number of measures:

On tap liquidity: Banks can borrow as much as 150 billion rupees from this window to lend to Covid-hit sectors such as hotels and the tourism industry. Tenors are as high as three years, with the window open through next March 31Support to lender for small businesses: The umbrella lender to small businesses will have access to a 160-billion rupee special cash window. The window will be open at the repo rate for a yearLoan resolution: More stressed borrowers like small businesses and individuals are included under this programForeign Portfolio Investors: Some rules will be eased for these fundsRegional rural banks will be allowed to raise cash via certificates of deposit

(Updates with more details throughout.)

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