RBI’s super dovish policy to keep loans and bank rates low

Mumbai: Reserve Bank of India (RBI) Governor Shaktikanta Das surprised markets on Thursday with a super accommodative monetary policy that not only left rates unchanged but also kept the dovish stance. Post-policy commentary was also supportive of growth, with the governor saying next year’s borrowing program would not be as heavy a burden as it appeared to be.
The status quo means that the cost of home loans and other borrowing linked to the repo rate will not increase for now. Deposits may also not increase sharply. With the repo and reverse repo rate held at 4% and 3.35% for the 10th consecutive policy, the focus shifted to financial market reforms. Repo is the rate at which RBI lends to banks, while reverse repo is the rate at which it borrows from them.
In his post-policy interaction, the Governor indicated that next year’s borrowing program would not be as large as budgeted and said the RBI had given foreigners leeway to invest Rs 1 lakh crore in Indian bonds, which will relieve some pressure. oversized loans. The RBI has also liberalized rules on interest rate derivatives, giving banks more leeway to extend hedging products to borrowers.
“The government will borrow Rs 65,000 crore to pass on to the National Highways Authority of India. This money would otherwise have been collected by NHAI,” Das said. He added that the government has also indicated that recoveries from small savings will be higher than expected, leading to a lower borrowing requirement. The RBI’s policy and subsequent dovish comments meant that the benchmark 10-year bond yield ended at 6.72%, down from 6.8% on Wednesday. Many expected the central bank to raise the reverse repo rate to reduce excess funds. Das said that although the RBI did not raise rates as the vote was in favor of a dovish stance, normalization was achieved through floating rate reverse auctions in a non-disruptive and transparent manner and the average rate at which the central bank borrows is 3.87. %.
RBI officials also stressed that the central bank was not taking a contrary position, but that the circumstances on the ground were different. “The overall character of inflation in the United States is different. In the US used car inflation is a major component, we don’t have that and we don’t import used cars either. In Europe one of the problems is the availability of truckers, we don’t have that problem in India. Food inflation according to the Food and Agriculture Organization of the United Nations is 29-30%, but our food inflation is 6.5%,” RBI Deputy Governor Michael Patra said. .