Record debt, recovery support to keep rate hikes by RBI in slow lane

The key takeaway from Governor Shaktikanta Das's address on Thursday will be how the RBI plans to support the government's record $200 billion borrowing

India’s central bank is set to stick with baby steps to policy normalization, as it is seized by the need to anchor borrowing costs for the government in addition to supporting a durable recovery in Asia’s third-largest economy. 

Those objectives will likely make the benchmark interest-rate a sideshow at this week’s monetary policy review, which is due Thursday. The Reserve Bank of India will instead likely raise the reverse repurchase rate to cut down inflation-inducing liquidity in the banking system -- a signal that it’s committed to return policy to pre-pandemic settings. 

But the key takeaway from Governor Shaktikanta Das’s address at 10 a.m. in Mumbai on Thursday will be how the RBI plans to support the government’s record 14.95 trillion rupee ($200 billion) borrowing plan in a market where demand is flagging.  

Here’s what else to watch for in his speech: 

Borrowing Blueprint 

Bond traders will look for clarity from Das on specific steps the central bank plans to keep the government’s borrowing costs down. The RBI last year used a so-called Government Securities Acquisition Program to buy 2.2 trillion rupees of debt between April and September. 

The program has since been halted, and Indian banks -- the largest purchasers of sovereign paper -- are already overstocked. 

“Markets would be looking forward to assurance and support from RBI to ensure that the massive borrowing program goes through smoothly,” said Anand Nevatia, fixed-income fund manager at Trust Mutual Fund. “While the RBI may not announce all measures in the forthcoming policy, markets would expect it to announce a purchase program or open-market operations over the course of the year.” 

The yield on the benchmark debt has surged nearly 40 basis points so far this year amid a global drop in the price of bonds. The high borrowing number in the budget as well as absence of any steps to facilitate global bond index inclusion have further roiled the domestic markets with auctions facing weak demand. 

Fighting Inflation  

While India’s consumer prices rose for a third straight month in December, the headline print is still within with the central bank’s 2%-6% target band -- allowing policy makers the room to look away as some global peers lift rates to fight inflation. Even then the RBI wouldn’t be falling behind the curve, Deputy Governor Michael D. Patra said last month. 

All but one of the 28 economists surveyed by Bloomberg as of Tuesday afternoon expect the main repurchase rate to be held steady at 4% Thursday. Bets for a hike in reverse repo rate -- the level at which the RBI absorbs cash from banks -- outnumbered those who saw no change 16-6. 

An increase in reverse repo rate, which is decided by the RBI as opposed to the benchmark rate that’s set by the six-member monetary policy committee, will help in raising the floor for borrowing costs in the banking system, given easy cash presents an upside risk to inflation that is already under pressure from oil at a seven-year high. 

Growth Pangs 

After likely pulling off a world-beating 9.2% growth in the current fiscal ending March, India’s economic growth is seen repeating the performance with an 8%-8.5% expansion next year, according to the Finance Ministry’s Economic Survey. With the government stepping up fiscal stimulus by boosting the size of its budget expenditure to keep growth going, it remains to be seen how long the RBI would want to keep monetary policy accommodative.  

“Two key concerns are likely to weigh in -- the future of fiscal-monetary policy coordination in light of an expansionary budget in India and the potential impact of imminent rate hikes and quantitative tightening by the U.S. Fed,” said Aastha Gudwani, an economist at Bank of America. “We don’t expect a material change to outlook for growth and inflation due to higher fiscal deficit.”