India’s huge borrowing binge puts RBI in focus: Decision guide

India’s huge borrowing binge puts RBI in focus: Decision guide

Most economists expect India’s central bank will hold interest rates for a fourth straight meeting this week as attention turns to how it’ll react to an expansionary budget and a massive government debt plan.

Finance Minister Nirmala Sitharaman’s annual budget on Feb. 1 emphasized spending to revive growth in an economy hurt by the coronavirus pandemic. That would give some comfort to the Reserve Bank of India, which did most of the heavy lifting in the past year through 115 basis points of interest-rate cuts and ensuring liquidity in the financial system.

The benchmark repurchase rate will be maintained at 4 per cent Friday, according to 24 of the 32 economists in a Bloomberg survey as of Wednesday, although cooling inflation has stoked expectations for a rate cut. Five of those surveyed expect a 25 basis-point cut and two predict a sharp 50 basis-point reduction.

Here’s what else to watch for when Das makes a statement at 10 a.m. on Friday following the Monetary Policy Committee’s meeting:

Liquidity stance

With growth prospects improving thanks to a vaccine roll-out last month, the RBI took some baby steps to unwind some of the extraordinary liquidity support provided to the financial system. But that rollback saw bond yields shoot up, a situation exacerbated this week by the government’s bigger-than-expected borrowing plan of 12 trillion rupees ($165 billion) — leaving the market looking to the RBI for guidance.


Traders will be looking forward to the RBI outlining an open-market bond purchase calendar, while some others expect easing the so-called held-to-maturity norms to boost banks’ debt purchases.

“It will be difficult for the market to absorb outsized borrowings and the RBI’s support will eventually be needed,” said Himanshu Malik, a fixed-income strategist at HSBC Holdings Plc in Hong Kong. “Market participants will be looking for a direction on liquidity policy and bond purchases.”

The central bank may also defer a scheduled roll-back of a cut in its Cash Reserve Ratio that was due by end-March.

Inflation outlook

Consumer prices eased to 4.59 per cent in December, marking the first time in nine months that price-growth returned within the RBI’s 2 per cent-6 per cent target band. That’s boosted the case for the central bank to lower its inflation forecast — from 5.8 per cent for the current quarter and 4.6 per cent-5.2 per cent in the first half of the next fiscal year starting April — and continue with an easy monetary policy stance.

RBI - InflationBloomberg

The RBI might not be too worried about the near-term inflationary impact of a higher fiscal deficit as it looks through the accounting adjustments and focuses on a better quality of capital spending, according to Samiran Chakraborty, chief India economist at Citigroup Inc.

“Monetary policy need not be restricted immediately to make space for fiscal policy and rather complement the fiscal. Any communication along these lines would set the broad direction of monetary policy going forward,” he said.

Growth forecast

The RBI will likely upgrade its growth forecasts, given the expansionary budget. It had earlier penciled in a growth of 0.7 per cent in the current quarter, 21.9 per cent in the April-June period and 6.5 per cent in the first-half of the fiscal year starting April. Economists in a Bloomberg survey predict 9.2 per cent GDP growth next year.

Indian economyBloomberg

Given the encouraging trend shown by high-frequency indicators, easing inflation, the vaccine roll-out and the budget’s focus on growth, the MPC could convey that it’s reached the end of the line for supporting the economy, according to ICICI Bank analysts.

“However, the messaging is expected to be very cautious, addressed to placate markets, assuring them that the RBI would take all steps to keep the cost of borrowing low,” analysts led by Sumedha Dasgupta wrote.

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