BofA sees Rajan pouring in funds as India's cash crunch worsens
Bank of America Merrill Lynch says India's central bank should set a schedule for bond purchases to help bring down lending rates amid a cash crunch in the financial system.
The Reserve Bank of India has bought 570 billion rupees ($8.5 billion) of sovereign debt since resuming open-market operations, or OMOs, in early December after almost two years. It plans to buy another 150 billion rupees of notes on Thursday. The benchmark 10-year yield is 82 basis points above the monetary authority's key repurchase rate that Governor Raghuram Rajan reduced by 125 basis points last year.
"A high 10-year yield has prevented banks from cutting lending rates further" despite the RBI's easing, BofA economists Abhishek Gupta and Indranil Sen Gupta wrote in a report. They expect the central bank will add another 200 billion rupees through OMOs this month and predict such purchases will rise to 1.8 trillion rupees in the year starting April 1, from 1.1 trillion rupees.