Mumbai: The Reserve Bank of India (RBI) on Friday expanded its bond buying program and kept key rates at record highs to support economic recovery, even as it lowered its forecast for economic growth amid of a devastating second wave of the pandemic.

Governor Shaktikanta Das said the central bank will buy a 1.2 trillion bonds in the September quarter under the Government Securities Acquisition Program (GSAP) to keep interest rates low and support the government’s borrowing program amid slower fund collections ‘taxes due to the pandemic.

The RBI’s six-member monetary policy committee voted to maintain accommodative monetary policy for as long as needed to revive growth. Reflecting the deterioration of the economy, the central bank reduced its estimate of gross domestic product (GDP) growth to 9.5 percent for the current fiscal year, from the 10.5 percent it had forecast earlier.

The resurgence of the pandemic in March stifled the nascent recovery seen in the second half of the previous fiscal year and prompted states to impose containment measures to contain the spread of the virus. The slowdown in economic activity has forced the central bank to further delay the normalization of its monetary policy and to introduce measures to support the economic recovery and the government’s borrowing program.

RBI is unlikely to change its position on interest rates until the first half of this fiscal year, said Madhavi Arora, economist at Emkay Global. “This in part suggests that amid clashes over the political goals of the so-called ‘impossible trinity’, the RBI has chosen to side with the pursuit of independent monetary policy and foreign exchange management goals. while being amortized for any significant foreign flow implication. We believe that while yields may rise gradually and in an orderly fashion, the curve is likely to flatten in the future, “said Arora.

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RBI is unlikely to change its interest rate stance before the first half of this fiscal year

The “impossible trinity” refers to the fact that the central bank, when deciding monetary policy, cannot simultaneously pursue the three objectives of fixed exchange rates, free movement of capital and autonomy of monetary policy. .

Governor Das said the others 40,000 crore of bond purchases under GSAP 1.0 will be made on June 27. From this, 10,000 crore would be the purchase of state development loans. “The GSAP 1.0 auctions have generated significant interest from market participants, with bid coverage ratios of 4.1 and 3.5, respectively, in the two auctions undertaken so far. The timing of the second auction was to replenish the liquidity drain due to restoring the cash reserve ratio to its pre-pandemic level of 4% of net demand and time liabilities, effective May 22. Das said. “Overall, the MPC was of the view that at this point political support from all parties is needed to regain the growth momentum that was evident in the second half of 2020-2021 and to sustain recovery once it has taken root. “

The central bank also raised its inflation forecast to 5.1% for the current fiscal year. “April’s 4.3% inflation rate offered some relief and some political leeway,” Das said.

He said foreign exchange reserves topped $ 600 billion as the RBI created buffers against spillover from other economies. RBI actively engages in both buying and selling in the forex market and its various segments, he said. “At the moment, it is not necessary to deploy additional tools to sterilize the inflows of foreign currency,” the governor told reporters. “In any event, at the end of the day (via) our daily repo window, the liquidity is sterilized. (Need for new instruments) will depend on how the situation develops,” he said. declared.

“While these flows alleviate external financing constraints, they also confer volatility in financial markets and asset prices and produce unwanted and unintended fluctuations in liquidity that can vitiate the stance of monetary policy,” added Das.

The country’s foreign exchange reserves rose $ 2.86 billion to a record high of $ 592.89 billion for the week ending May 21, RBI data showed on Friday.

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