Monetary policy: RBI keeps rates on hold, promises ample liquidity

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February 6, 2021 4:15 AM

Bond yields trend up as GDP rises and borrowings surge

“The cost of capital for companies is going to go up,” bankers said.“The cost of capital for companies is going to go up,” bankers said.

Despite worries on inflation, Reserve Bank of India (RBI) on Friday opted to leave policy rates unchanged even as it promised an accommodative stance for rates and, critically, liquidity. “The RBI stands committed to ensure the availability of ample liquidity in the system…As the government’s debt manager and banker, the Reserve Bank will ensure the orderly completion of the market borrowing programme in a non-disruptive manner,” RBI governor Shaktikanta Das observed. The central bank expects the economy to grow at 10.5% in 2021-22.

However, despite assurances from the central bank it would ensure the government’s large borrowing plan of Rs 12 lakh crore went through smoothly, the bond markets remained somewhat nervous with yields trending up.

Experts noted interest rates are headed up and that the trading range for the benchmark which has been ruling at 5.75-6% is expected to shift upwards. Moreover, the quantum of surplus liquidity could be smaller in 2021-22.

“The cost of capital for companies is going to go up,” bankers said.

Pranjul Bhandari, chief economist, HSBC, believes the aim of the central bank will be to ensure that financial conditions do not tighten too sharply over the foreseeable future.

Economists believe the policy repo rate will stay unchanged through 2021 and rise as growth picks up. “We expect the policy stance to shift to ‘neutral’ from ‘accommodative’ in Q3, the normalisation of the policy corridor to begin in Q4, and 50 bps worth of repo rate hikes in H1 2022,” Sonal Varma, chief economist at Nomura, wrote.

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