India's RBI sticks to dovish policy path

Mumbai

INDIA'S central bank stuck to its dovish tone to ensure an economic recovery, diverging from an increasing number of global policy-makers moving towards tighter monetary policy to tackle inflation.

Even though India is poised to post the quickest growth among major economies this year, output is just barely above its pre-pandemic level, Reserve Bank of India governor Shaktikanta Das said after the rate panel held key interest rates steady on Thursday (Feb 10). Private consumption is still lagging and price increases are expected to moderate, he said.

That underlined the need to keep borrowing costs lower for longer in an economy where private consumption makes up some 60 per cent of gross domestic product.

The rupee and bond yields fell as the RBI didn't signal a return to pre-pandemic policy settings, which the market was expecting.

The rupee lost 0.2 per cent, while the yield on benchmark notes fell 7 basis points on the absence of a hike in reverse repo - the rate at which it absorbs cash from banks. Stocks advanced.

"Sometimes markets expect dessert, but then realise that the main course is still not over," said Aurodeep Nandi, India economist at Nomura Holdings. "The market was broadly expecting a drawdown of ultra-accommodative monetary policy."

Thursday's decision to stand pat when global peers are tightening highlights the contradictory multiple objectives the RBI has to contend with. As the government's debt manager it has to keep borrowing costs low to ensure that a US$200 billion debt programme goes through smoothly, while also achieving price stability as an inflation-targeting central bank without hurting growth.

"Private consumption, the mainstay of domestic demand, continues to trail its pre-pandemic level," Das said. "The persistent increase in international commodity prices, surge in volatility of global financial markets and global supply bottlenecks can exacerbate risks to the outlook."

The central bank sees GDP growth slowing to 7.8 per cent in the year beginning April, from a world-beating 9.2 per cent estimated by the government for this year.

Policy makers see the government's budget proposals - to borrow and spend big - boosting aggregate demand. Given the government's huge borrowing plan, Das sought to attract fund inflows by increasing a special limit for long-term foreign investors in Indian bonds by one trillion rupees (S$17.9 billion) to 2.5 trillion rupees. The RBI also said that variable rate repos and variable rate reverse repos of 14-day tenor will operate as the main liquidity management tool. BLOOMBERG