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Mumbai: The Reserve Bank of India (RBI) on Friday expanded its bonds purchase programme and kept key policy rates at a record low to support economic recovery, even as it downgraded its economic growth forecast amid a devastating second wave of the pandemic.

Governor Shaktikanta Das said the central bank will buy an additional 1.2 trillion of bonds in the September quarter under the Government Securities Acquisition Programme (GSAP) to keep interest rates low and support the government’s borrowing programme because of a slowdown in tax collections because of the pandemic.

RBI’s six-member monetary policy committee voted to maintain an accommodative monetary policy stance for as long as necessary to revive growth. Reflecting the deterioration in the economy, the central bank cut its gross domestic product (GDP) growth estimate to 9.5% for the current fiscal from 10.5% it forecast earlier.

The resurgence of the pandemic in March snuffed out the nascent recovery seen in the second half of the past fiscal and prompted states to impose lockdowns to contain the spread of the virus. The slowdown in economic activity has forced the central bank to further delay monetary policy normalization and introduce measures to support economic recovery and the government’s borrowing programme.

RBI is unlikely to change its interest rate stance before the first half of this fiscal year, said Madhavi Arora, an economist at Emkay Global. “This partly hints that amid conflicts of policy goals of the so-called ‘impossible trinity’, RBI chose to side with the pursuit of goals of independent monetary policy and forex management while being buffered for any consequent implication on foreign flows. We reckon even as yields may inch up gradually and orderly, the curve will likely flatten ahead," Arora said.

RBI is unlikely to change its interest rate stance before the first half of this fiscal year
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RBI is unlikely to change its interest rate stance before the first half of this fiscal year

The ‘impossible trinity’ refers to the fact that the central bank, when deciding monetary policy, can’t pursue all the three objectives of fixed exchange rates, free movement of capital and monetary policy autonomy at the same time.

Governor Das said that the remaining 40,000 crore of bonds purchases under GSAP 1.0 will be conducted on 27 June. Of this, 10,000 crore would constitute the purchase of state development loans. “The auctions under GSAP 1.0 have evoked keen interest from market participants, with bid cover ratios of 4.1 and 3.5, respectively, in the two auctions undertaken so far. The timing of the second auction was aimed at replenishing the drainage of liquidity due to the restoration of the cash reserve ratio to its pre-pandemic level of 4% of net-demand-and-time liabilities, effective 22 May," Das said. “On balance, the MPC was of the view that at this juncture, policy support from all sides is required to regain the momentum of growth that was evident in the second half of 2020-21 and to nurture the recovery after it has taken root."

The central bank also increased its inflation forecast to 5.1% for the current fiscal. “The inflation print for April at 4.3% has offered some relief and policy elbow room," Das said.

He said that the forex reserves crossed $600 billion as RBI built buffers against spill-overs from other economies. RBI actively engages in both purchases and sales in the foreign exchange market and its various segments, he said. “At the moment, there is no necessity to deploy additional tools to sterilize forex inflows," the governor told reporters. “In any case, at the end of the day (through) our daily reverse repo window, the liquidity gets sterilized. The (need for new instruments) will depend on how the situation evolves," he said.

“While these flows ease external financing constraints, they also impart volatility to financial markets and asset prices and produce undesirable and unintended fluctuations in liquidity that can vitiate the monetary policy stance," Das added.

The country’s foreign exchange reserves rose by $2.86 billion to a record high of $592.89 billion for the week ended 21 May, RBI data showed on Friday.

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