Goldman sees little room for RBI to ease rates

By Anirban Nag

India’s central bank is running out of room to ease interest rates further, but there’s little reason to worry as the current monetary policy isn’t seen as restrictive to money supply growth.

That’s the finding of a report from Goldman Sachs Group Inc. based on a study of 10 different methodologies, including various real rates of interest, inflation expectations, financial conditions, slope of the yield curve, growth of money supply and estimated monetary policy reaction time.


With the Reserve Bank of India having eased rates by 135 basis points in five moves last year, the Goldman analysts said there may not be a need for any “further significant loosening of monetary policy stance” -- unless economic conditions warrant so.

“Adverse data on inflation or inflation expectations, or a renewed bout of weakness in economic activity, could trigger another cut in 2020 – but this research seems to suggest that any significant move in a downward direction would raise the risk of monetary undershooting and a policy reversal later in 2020 or in 2021,” wrote the analysts led by Prachi Mishra, chief India economist at Goldman Sachs.

The RBI has been on a pause since December after inflation spiked. Gains in consumer prices are now hovering well above the central bank’s 2 per cent-6 per cent target at 7.6 per cent in January. The Monetary Policy Committee has retained its easing policy bias, while saying there’s room for future action to support the economy that’s set for its weakest expansion since 2009 this year.

For now, the central bank has adopted unconventional methods to keep borrowing costs low. In December, the RBI announced a Federal Reserve-style ‘Operation Twist’ -- buying long-dated bonds and selling the shorter tenor ones. This month, it started long-term repo operations to inject $14 billion into the financial system, inspired by the European Central Bank’s use of long-term loans to banks.