India's central bank holds rates on inflation risk, but more easing seen
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India's central bank holds rates on inflation risk, but more easing seen

Global Economy

Reuters
06 August, 2020, 04:00 pm
Last modified: 06 August, 2020, 04:04 pm

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India's central bank holds rates on inflation risk, but more easing seen

Reserve Bank of India (RBI) Governor Shaktikanta Das said space for monetary policy easing remains, but the central bank will ensure inflation stays within its target range

Reuters
06 August, 2020, 04:00 pm
Last modified: 06 August, 2020, 04:04 pm
FILE PHOTO: CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai, India, February 7, 2019. REUTERS/Francis Mascarenhas
FILE PHOTO: CCTV cameras are seen installed above the logo of Reserve Bank of India (RBI) inside its headquarters in Mumbai, India, February 7, 2019. REUTERS/Francis Mascarenhas

India's central bank kept interest rates on hold on Thursday, as it sought to contain a rise in retail inflation though it vowed to keep policy sufficiently loose to help revive growth in the coronavirus-battered economy.

Reserve Bank of India (RBI) Governor Shaktikanta Das said space for monetary policy easing remains, but the central bank will ensure inflation stays within its target range.

To ease debt strains on companies and lenders, the RBI said it would allow restructuring of corporate loans by banks, a move that was widely awaited by the industry.

The repo rate INREPO=ECI was left at 4.0 percent and the reverse repo rate INRREP=ECI at 3.35 percent. Two-thirds of analysts in a Reuters poll had predicted a 25 basis point cut in the repo rate, while the rest saw no change.

The RBI has already reduced the repo rate by a total of 115 basis points since February, on top of the 135 basis points in an easing cycle last year, from 6.50 percent.

"Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold," Das said.

The committee, however, unanimously decided to continue to keep its accommodative policy stance "as long as necessary to revive growth".

The country was placed under one of the strictest lockdowns in the world in late March for more than two months to halt the spread of the coronavirus. The government gradually eased restrictions in June although infections continue to rise.

"While today's decision has come as a surprise to us, we believe slack in the economy amid easing inflation rate will provide MPC space to cut the policy rate by 25-50 bps in H2FY21," said Garima Kapoor, economist at Elara Capital.

DEBT RESTRUCTURING

To help banks at a time when bad loans are expected to double, the RBI said it would allow a one-time restructuring of loans.

Das said within the current bad loan resolution framework a window would be provided for lenders to implement a resolution plan for corporate loans without a change in ownership while also allowing these to remain standard and not be downgraded.

The central bank's experience with loan restructuring in the past had not been encouraging.

Restructuring had been used to keep loans evergreen, whereby banks provided additional loans to stressed borrowers, often indirectly, to enable them to repay existing loans.

This led to a massive pile up in bad loans between 2008 and 2015.

"Doing away with the loan moratorium and announcing a responsible scheme for restructuring of the stressed assets are both prudent and wise from the perspective of financial stability," said Rupa Rege Nitsure, chief economist at L&T Financial Holdings.

Das said RBI was setting up a committee under K V Kamath, the former head of the New Development Bank, set up by the BRICS to give recommendations on the required financial parameters, along with the sector specific benchmark ranges which need to be factored into the resolution plans.

"The pandemic poses a challenge of epic proportions. We shall remain alert and watchful and collectively do whatever is necessary to revive the economy and preserve financial stability," Das said.

South Asia

India / Reserve Bank of India (RBI)

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