RBI announces new measures to maintain market stability

The Reserve Bank of India (RBI) announced new measures on Monday to maintain stability in the financial system during the coronavirus pandemic, including two more tranches of special open market bond operations in its ‘Operation Twist’.

The central bank said it would also raise the ratio of securities that banks can hold until maturity within their statutory liquidity ratio (SLR) or mandatory bond holding requirement, which would help limit losses due to market volatility.

“The RBI remains committed to use all instruments at its command to revive the economy by maintaining congenial financial conditions, mitigate the impact of COVID-19 and restore the economy to a path of sustainable growth while preserving macroeconomic and financial stability,” the central bank said in a statement.

RBI said it will conduct two more tranches of 100 billion rupees ($1.36 billion) each of simultaneous sale and purchase of bonds in September, or ‘Operation Twist’ as it is popularly known.

Indian bond yields had risen in recent weeks due to high government borrowing, rising inflation and reduced expectations of interest rate cuts following the release of minutes of the RBI’s monetary policy committee’s latest meeting.

Some analysts, however, said the RBI’s measures did not go far enough. “It’s a band aid for the market but the steps also show RBI doesn’t have space for outright OMOs (open market operations),” said A. Prasanna, chief economist at ICICI Securities Primary Dealership.

RBI, however, also said there were indications that food and fuel prices were stabilising and the recent rise in the rupee was helping to contain imported inflationary pressures.

The bank said that it will also conduct term repo operations for a total of 1 trillion rupees at the current repo rate in mid-September to assuage pressures from advance tax outflows.

“This move does not take away the problem of supply overhang, the impact of this move in (keeping bond yields in check) will only be temporary,” said Ashhish Vaidya, Head of Trading and Asset Liability Management at DBS Bank India.

“What the market requires, due to the bond supply overhang, is some sort of decisive move in terms of OMO purchases, like what the central banks in developed markets have demonstrated.”

RBI said banks would now be allowed to hold up to 22 per cent of their SLR securities under the held-to-maturity category until March 31, 2021, up from the current limit of 19.5 per cent.

Meanwhile the deceleration in the production rate of India’s eight major industries’ narrowed on a sequential basis in July, but remained deep in the red on a year-on-year count.

As per the official data, the Index of Eight Core Industries for July declined by (-) 9.6 per cent (provisional) compared to decline of (-) 12.9 per cent (revised) during the previous month (June).

Though not comparable, the ECI index had shown a growth of 2.6 per cent in July 2019.

“The combined Index of Eight Core Industries stood at 119.9 in July, 2020, which declined by 9.6 (provisional) per cent as compared to the Index of July, 2019. Its cumulative growth during April to July, 2020-21 was (-) 20.5 per cent,” said the Office of Economic Adviser, DPIIT in the Index of Eight Core Industries for July, 2020.

“Final growth rate of the Index of Eight Core Industries for April 2020 is revised at (-) 37.9 per cent. The Eight Core Industries comprise 40.27 per cent of the weight of items included in the Index of Industrial Production (IIP).”

India’s general government debt is likely to remain high in the years to come and will significantly impact the government’s ability to spend in the upcoming decade, according to a report by Motilal Oswal Financial Services.

The EcoScope report said that India’s general government debt, or the overall debt of the Centeal and the state governments, is expected to reach 91 per cent of GDP in the current fiscal and is likely to stay above 90 per cent of the GDP till FY23.

It added that after FY23, the general government debt levels will moderate to 80 per cent by FY30.

The general government debt rose to 75 per cent of GDP in FY20 from 70 per cent in FY18.

“This surge in India’s government debt-to-GDP ratio would restrict its ability to grow its spending significantly and support economic activity in the 2020s decade, as it has done in the past few years,” it said.

While real GDP growth averaged at 6.8 per cent between FY14 and FY20, real fiscal spending grew at an average of 9 per cent during the period. In FY20, while real GDP growth weakened to 4.2 per cent, fiscal spending is estimated to have contributed 1.1 percentage points or 27 per cent to annual real GDP growth.

Reuters