India’s central bank keeps key rate unchanged on inflation risk

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MUMBAI (Aug 6): India’s central bank kept interest rates unchanged, while outlining a number of measures to ease stress in the banking sector as the economy heads for its first full-year contraction in more than four decades.

The Monetary Policy Committee (MPC) voted to keep the benchmark repurchase rate at a record low of 4%, governor Shaktikanta Das said in an online broadcast today. Economists were split on the decision, with half of the 44 surveyed by Bloomberg predicting a 25 basis-point reduction, one predicting a 50-point cut and the rest seeing no change.

The six-member committee, which has already lowered rates by 115 basis points this year, retained its “accommodative” stance, implying there’s still room to cut rates again.

“While the space for further monetary policy action is available, it is important to use it judiciously to maximise the beneficial effects on the underlying economy,” Das said. The MPC will “continue with the accommodative stance of monetary policy as long as necessary to revive growth”, he said.

Asia’s third-largest economy is struggling to recover from one of the world’s biggest lockdowns, which brought most industries to a virtual halt but failed to slow the spread of the coronavirus outbreak. Gross domestic product (GDP) is set to contract in the fiscal year through March 2021, Das said, without giving a specific forecast.

Recent high-frequency indicators from car sales to Google mobility reports show signs of a recovery remain muted despite the economy reopening. Economists in a Bloomberg survey predict a 5.2% decline in GDP in the fiscal year.

“Recovery of the economy assumes primacy,” Das said, adding: “Regulatory response has to be proactive, dynamic and balanced.”

The governor also announced a number of measures to support a fragile banking sector:

  • Additional special liquidity — 100 billion rupees (US$1.34 billion or RM5.61 billion) — to Nabard and National Housing Bank, which are umbrella organisations that finance mortgage lenders and housing finance companies, as well as agriculture
  • A window to allow lenders to restructure some loans
  • Stressed small borrowers will be made eligible to restructure their debt — as long as they weren’t already defaulting earlier
  • Easier rules for shadow banks lending against gold jewelry
  • Priority sector credit — the Reserve Bank of India (RBI) is looking to reassess how much capital needs to be set aside for these loans, which could allow banks to save precious capital

The rupee was little changed and sovereign bonds fell after interest rates were left unchanged, while shares in Indian cash-for-gold lenders rose after the central bank eased rules for advances.

The RBI’s move to enable restructuring of loans includes allowing banks the discretion to extend a moratorium on loan repayments for up to two years, the central bank said in a separate statement.

The moratorium was aimed at providing some cushion for struggling businesses and households, but was an additional burden on lenders who are battling bad loans. Senior bankers had earlier opposed extending the programme amid concerns it was encouraging even borrowers with the ability to service debt to withhold payments.

The RBI has pumped in billions of dollars into the financial system to encourage banks to lend more, yet loan growth has been languishing because of fears of more bad loans. A recent central bank report showed that the gross non-performing asset ratio is expected to jump by four percentage points to 12.5% if the economy contracts by 4.4% this year.

Today’s rate pause came amid inflation spiking above the central bank’s 2-6% target band for most of this year. Rising food, fuel and gold prices have driven inflation higher, as well as supply-side constraints due to the lockdown.

Das said inflation will remain elevated in the second quarter of the fiscal year and ease in the second half, aided by favourable base effects.