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ASIA ECONOMICS: ING Says India's Central Bank Begins Policy Normalization; Surprises With Cash Reserve Ratio Increase

· 02/05/2021 01:04

05:53 AM EST, 02/05/2021 (MT Newswires) -- ING said that the Reserve Bank of India (RBI) Friday unanimously voted to leave the key policy rates, the repurchase rate and the reverse repurchase rate, unchanged at 4.00% and 3.35% respectively.

There was no change to the accommodative policy stance that was in place since the outbreak of COVID-19 and will be maintained as long as necessary.

However, policymakers caught the financial markets off guard as they decided to raise the cash reserve ratio (CCR) for banks by 50 basis points to 3.50% effective March 27 -- the first of the two-phase normalization of the 100 bp cut implemented at the onset of the COVID-19 outbreak in March 2020, noted ING.

However, it didn't come as a complete surprise, though in that the cut was earmarked for one year, wrote the bank in a note. The second phase of 50bp CRR hike to 4.00% was set for May 22. While CRR hike typically drained out banking system liquidity, RBI's Governor Shaktikanta Das saw it as opening space for injecting additional liquidity.

Among other measures announced Friday included an exemption for banks from maintaining cash reserves against loans made to new small borrowers; extension of relaxation of the marginal standing facility (MSF) for banks for six more months until the end of September; and, easier availability of funds to non-bank finance companies for lending to stressed sectors.

Direct online access for retail investors to the government bond market via gilt accounts with the central bank was also proposed in a drive to deepen financial markets, as well as an integrated ombudsman scheme for customer grievances redressal to be rolled out by June 2021.

The governor's statement struck an optimistic cord on the recovery of the economy from a record pandemic-induced slump, particularly noting significant fiscal thrust, improved capacity utilization in the manufacturing sector, surging direct and portfolio investment, and improving flows of financial resources to the commercial sector, according to ING.

The central bank saw India's gross domestic product (GDP) bouncing by 10.5% in the fiscal year 2021-22, which starts in April. This was to be led by a front-loading of recovery with as much as a 26% surge in H1 of the year followed by an estimated 7.7% contraction in the current fiscal year.

On inflation, RBI predicted it hovering near the top end of its 2%-6% target zone throughout H1 of FY21-22 and subsequently easing to 4.3% in Q3. The inflation optimism rested on food inflation trajectory, which the RBI expected to be shaped favorably by bumper harvest and softer poultry demand amid worries of avian flu, added the bank.