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Indian bonds and stocks gained after the central bank’s cash-infusion plan fueled hopes of an interest-rate cut as early as next week.
The Reserve Bank of India Monday evening said it will infuse $18 billion to address the worst cash crunch in over a decade. Ample banking system liquidity is seen as a necessary condition for smooth transmission of rate cuts when easing starts. It also brings down borrowing costs in the economy through lower bond yields.
The liquidity boost is likely aimed at supporting an economy forecast to grow at the slowest pace in four years. The measures prompted some global banks to call for interest-rate cuts in the Reserve Bank of India’s Feb. 7 policy meeting.
Standard Chartered Plc brought forward its rate-cut call to next week’s review from April. Citigroup Inc. and Barclays, which earlier said a rate cut was a close call, now see Monday’s steps as a precursor to a pivot in February.
“We see measures as a decisive turn in the monetary policy easing cycle by the Reserve Bank of India,” Goldman Sachs Group Inc.’s economists led by Santanu Sengupta, wrote in a note. Goldman Sachs expects a quarter-point cut in the February policy, followed by another one in April.
Indian stocks rose led by lenders such as ICICI Bank Ltd. and HDFC Bank which rose over 2% each. The yields on the 10-year bond fell one basis point after declining as much as six points earlier.
The central bank plans to buy 600 billion rupees ($6.9 billion) worth of bonds via auction purchases in the open market. It will also hold a $5 billion dollar/rupee buy/sell forex swap on Jan. 31 and inject another 500 billion rupees via a 56-day repo auction Feb. 7.
The RBI will in future continue to use the three tools employed on Monday to manage durable liquidity, said a person familiar with the authority’s thinking. It doesn’t want to use the cash reserve ratio frequently because it sees it more as a policy instrument, rather than only a liquidity tool, the person said.
The move followed after the banking system liquidity deficit rose to about three trillion rupees this month. The shortage was mainly due to RBI’s aggressive intervention in the forex market where the rupee has been hitting record lows against the dollar.