RBI’s Das adopts the Draghi playbook of unconventional tools to boost demand

The six-member Monetary Policy Committee also kept the door open for further monetary policy easing, by retaining its accommodative stance

India’s central bank resorted to unconventional policy tools again, as it shored up efforts to bring borrowing costs down and boost demand in an economy on course for its weakest expansion since 2009.

The Reserve Bank of India offered to inject as much as $14 billion cash through one- and three-year funding operations, akin to the long-term repos put in place by the European Central Bank. It also relaxed bad-loan norms for some small borrowers and eased reserve requirements for select lending on Thursday, while keeping the benchmark interest rate at a decade-low of 5.15% following a recent spike in inflation.

“It has to be kept in mind that the central bank has several instruments at its command that it can deploy to address the challenges the Indian economy faces in terms of sluggishness in growth momentum,” Reserve Bank of India Governor Shaktikanta Das told reporters in Mumbai.

The injection of more durable and long-term cash comes weeks after the RBI announced its own version of “Operation Twist” -- where it is buying long-dated government securities and selling short-term bonds. That has helped in better transmission of the central bank’s 135 basis points of rate cuts last year, Das said.

“Das has done a Draghi again,” Arvind Chari, head of fixed income at Quantum Advisors Pvt Ltd. in Mumbai, told BloombergQuint, referring to the European Central Bank’s long-term repo operations that started in 2014. He has in the past likened Das’s comment on sticking to an easing bias for “as long as it is necessary” to the “whatever it takes” sentiment spelled by Mario Draghi, the former head of the ECB.

Going Beyond

In December, Das resorted to ‘Operation Twist’ with the aim of keep borrowing costs in check after a shock spike in inflation forced the MPC to pause on rate cuts. With inflation now at 7.35%, the central bank’s ability to use the regular rate instrument to lower borrowing costs has diminished.

While the MPC said it “recognizes that there is policy space available for future action,” the outlook for inflation is “highly uncertain at this juncture.”

High inflation has already pushed India’s real rates -- adjusted for inflation -- deep into negative territory, making it less attractive to investors chasing high-yielding assets in emerging markets.

“The RBI is keen to experiment with a wider toolkit, especially as its hands are tied in the short term, given the spike in inflation,” said Mitul Kotecha, senior EM strategist at TD Securities in Singapore. “The use of unconventional measures such as LTRO offers a way to try to enhance the monetary transmission mechanism and fine-tune policy, lowering shorter term yields, without having to cut rates.”

The bond markets cheered the move, with yields on the two-year notes dropping by 18 basis points to 5.82% and that of the 3-year notes declining by a similar margin. Yield on the benchmark 10-year bonds was down by 5 basis points.

Mild Recovery

That drop in bond yields should translate into lower borrowing costs and help underpin the green shoots emerging in the economy.

Growth in the year starting April is expected to rebound to 6% from an estimated 5% in the current fiscal year, according to the RBI. That matches the lower end of the government’s 6%-6.5% forecast and comes amid early signs of a growth turnaround in the economy.

What Bloomberg's Economists say

“Looking ahead, we expect the RBI to keep its accommodative hold at its next review in April. Beyond that, inflation is likely to ease back into the 2-6% target range, which would open up room for a rate cut in June.”

-- Abhishek Gupta, India economist

The RBI flagged downside risks to growth from the coronavirus, saying the pandemic may “impact tourist arrivals and global trade.” That comes at a bad time for India where recent high-frequency data show that the manufacturing and services sectors are rebounding after a slump. A global slowdown could impact exports which have been rather sluggish.

Central banks across Southeast Asia signaled strong policy action this week to counter a hit to their economies from the viral outbreak. The Bank of Thailand cut its benchmark interest rate to a record-low, while the Philippines also lowered borrowing costs. Singapore signaled there was room for the currency to ease and Bank Indonesia Governor Perry Warjiyo said the central bank will keep policy accommodative this year.