RBI signals rate cuts as it boosts liquidity

By Anirban Nag

India’s central bank governor 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.

Governor Shaktikanta 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.

Indian corporate bonds and bank stocks jumped after Friday’s measures that included a 500 billion rupee ($6.5 billion) targeted injection to support companies and lenders. Government bonds also rallied, with the yield on the 6.18 per cent 2024 debt falling 26 basis points to 5.48 per cent, and that of the benchmark 10-year note sliding nine basis points to 6.35 per cent. A gauge of bank stocks surged 6.8 per cent to a one-month high, while the S&P BSE Sensex rose 3.2 per cent.

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.”

Das announced a series of measures:

• 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 500 billion rupees 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

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

“In the next round, the RBI should cut both the repo and reverse repo rates by 75 basis points,” said Kaushik Das, chief India economist at Deutsche Bank AG in Mumbai.