India’s central bank holds key interest rates as inflation rises

India’s central bank (CB) kept key 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 and personal loans by banks, a move that was widely awaited by the industry.

The repo rate was left at 4.0% and the reverse repo rate at 3.35%, against a median forecast for a 25 bp cut in a Reuters poll.

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

“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.

Retail inflation in June rose 6.09%, higher than the RBI’s 2%-6% mandated target range.

To help banks at a time when bad loans are expected to nearly 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.

Lenders will need to make an additional 10% in provisioning for the restructured accounts.

“The RBI relaxation seeks to ensure that a viable promoter, solely impacted on account of the COVID pandemic, can continue his entrepreneurship and provide the path of resolving the financial distress within a two-year sunset,” said Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co, a law firm.

Restructuring loan schemes have also been allowed for loans given to individuals and small businesses. In case of personal loans, the restructuring can be extended for two years. For small businesses, the restructuring scheme already in place will be extended till March 31, 2020.

“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.

The key Indian equity indices traded on a positive note on Thursday as the Reserve Bank of India announced monetary policy. Healthy buying was witnessed in IT and healthcare indices.

Meanwhile, Bombay Stock Exchange (BSE) Sensex closed at 38,025.45, higher by 362.12 points or 0.96 per cent from the previous close of 37,663.33.

The Nifty50 on the National Stock Exchange (NSE) closed at 11,200.15, higher by 98.50 points or 0.89 per cent from the previous close.

The Indian rupee traded around 75.11 against the US dollar. India’s policymakers should focus on protecting the economy as businesses struggle amid the coronavirus pandemic instead of being overly focused on what ratings agencies think, former Reserve Bank of India governor Raghuram Rajan said on Thursday.

“It is also important to convince both domestic and international investors that after the crisis associated with the pandemic is over, we will return to fiscal responsibility over the medium term, and the government should do more to convince them of that,” Rajan told the Global Markets Forum.

Reuters