Financial markets recover through liquidity plan and dissipate between RBI and government

MUMBAI (Reuters) – Indian financial markets rallied on Monday, leaving aside worries about renewed relations between the central bank and the government, preferring to be comforted by plans for a major cash injection by the bank. .

On Friday night, Viral Acharya, deputy governor of the Reserve Bank of India (RBI), warned that the independence of a central bank could be "potentially catastrophic", which would indicate that it is pushing hard government pressure to relax its policies and reduce its powers of a general election scheduled for next May.

But India's bond markets, rupees and stock markets all won on Monday after announcing, shortly before ABIRY's speech, that the RBI would buy 400 billion rupees ($ 5.45 billion) from China. 39, government bonds via open market operations in November. seeks to inject liquidity into the market.

The injection comes as there was fears of a credit crunch after failures by a major infrastructure finance company.

The yield on 10-year benchmark bonds fell to 7.80%, its lowest level since August 14 and 7.88% Friday.

The rupee rose to 73.32 for a dollar from the 73.46 closing on Friday, while the benchmark rose 0.8%.

In his speech to major industrialists, Mr. Acharya cited the Argentine government's interference in the affairs of its central bank in 2010 as an example of what can go wrong. This provoked an uprising of investors and a booming of bond yields, seriously harming its economy.

"Governments that do not respect the independence of the central bank will sooner or later suffer the wrath of the financial markets, fanning the fires of the economy and abandon the day they undermine a major regulator. ", did he declare.

The speech ran counter to the government's efforts to ease policies and curtail some of the central bank's powers, thus creating an additional gap between the RBI and the government of Prime Minister Narendra Modi.

While government officials remained largely silent in response to the speech, the issues raised by the RBI's top leaders – including the fact that the government is asking the central bank to make greater profits to finance its budget deficit – have been well known for years.

Traders have said that the markets' reaction does not mean they are not monitoring the relationship between the government and the central bank with caution.

"Although the arguments put forward by the RBI are not new, as an investor, it is important to see if the government ends up financing its fiscal deficit by forcing the central bank to transfer more money from its reserves or not, "said a foreign bank trader. , adding that such "shortcuts" could undermine investor sentiment.

Others hoped that the conflict would be resolved.

"If people start questioning Modi about the transparency and independence of the central bank, he could ask his officials to reach a mutual agreement with the RBI," said Ashish Vaidya, managing director and head of money markets. at DBS Bank in India. . He said that finally a "ground of agreement will have arrived".

($ 1 = 73.35 Indian rupees)