The rupee fell sharply against the dollar on Wednesday as currency markets anticipate increasing rupee liquidity in the wake of RBI’s announcements.
The Reserve Bank of India (RBI) on Wednesday stayed pat on rates, shrugging aside inflationary pressures, and asserted it would support the nascent recovery by staying ‘accommodative’ for as long as was needed. RBI governor Shaktikanta Das said the ‘accommodative’ stance would continue as long as necessary to ‘sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy’.
The central bank backed up its reassurance launching a G-sec Acquisition Programme (G-SAP) in it committed to purchasing a specified quantum of bonds in the secondary market. The measure comes in addition to other liquidity-infusing tools like OMOs and Operation Twists and the central bank’s explicitly dovish tone reassured the bond markets; bonds rallied smartly with benchmark yields tumbling by about ten basis points. The first purchase worth Rs 1 lakh crore will take place in Q1FY22 and Das made it clear this was not a one-off. ”We intend to continue with it,” he said.
The rupee fell sharply against the dollar on Wednesday as currency markets anticipate increasing rupee liquidity in the wake of RBI’s announcements. Experts, however, pointed out the RBI had enough of a war chest in $580 billion of reserves to fight any dollar outflows.
The central bank has the onerous task of ensuring the Centre’s large borrowing programme, of a gross Rs 12 lakh crore plus, for 2021-22 goes through. Das reiterated it was important to rein in yields so that even companies could borrow at affordable rates and the recovery could gather steam. While expressing concerns over the surge in infections and localised restrictions, the central bank left its GDP growth projection for FY22 unchanged at 10.5% though the inflation projections were raised slightly; it expects CPI inflation to be above 4% over both FY22 (5%) and FY23.
Economists have pointed out the continuing accommodative stance was not surprising given the many uncertainties and challenges that have arisen with the sharp resurgence of the infections.