With last year’s five interest rate cuts failing to buttress growth, the Reserve Bank of India (RBI) has resorted to active management of the government bond yield curve to keep borrowing bosts in check, according to Bloomberg.
Key points
The RBI’s recent shift to targeted cash injections and credit easing contradicts the rhetoric that it only looks to smoothen liquidity and facilitate the government’s market borrowing without targeting bond prices.
“India’s fiscal overhang, characterized by large public sector deficit and debt, creates a tendency for the yield curve to steepen. At a time when growth is well below potential, that is not desirable,” said Taimur Baig, chief economist at DBS Bank in Singapore.
RBI’s unconventional policy moves
Last week, it announced longer-term repos for 1- and 3-year at the policy rate in a bid to lower short-term yields.
In mid-December, it adopted a U.S. Federal Reserve-like Operation Twist — buying long-term bonds and simultaneously selling shorter tenor debt.
In 2019, RBI did two forex swaps to inject rupee liquidity as against its usual tool of open market operations.
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