The Reserve Bank of India (RBI) announced a ₹1 trillion bond-buying plan to keep a lid on long-term interest rates amid a massive government borrowing programme, even as it held policy rates steady and retained an accommodative stance to underpin the fragile economic recovery.
RBI on Wednesday also committed to extending liquidity measures that were introduced last year after the covid outbreak by six months, further delaying an anticipated liquidity normalization programme.
As part of the government security acquisition programme (G-SAP 1.0), RBI will buy ₹1 trillion worth of bonds from the secondary market in the three months to 30 June, with the first purchase of ₹25,000 crore on 15 April. RBI has been under intense pressure from bond traders, worried about a glut of government papers, to announce a purchase plan to mop up the surge in supply.
Last year, RBI bought ₹3.3 trillion worth of government securities through open market operations (OMO), which helped it manage a record ₹13.7 trillion government borrowing programme. The government plans to borrow ₹12.05 trillion this year. “This is different from the usual OMO calendar. We have given it a distinct character. This programme will run in addition to normal liquidity adjustment facility (LAF), special open market operations (OMO) and other instruments. It’s for the entire quarter that we announced a specific quantum. Signals from RBI and action from RBI have to be weighed together,” governor Shaktikanta Das told reporters.
This is the first time RBI is committing its balance sheet for the conduct of monetary policy, said RBI deputy governor Michael Patra. “Giving an amount will help the market know upfront how much is the borrowing programme. It’s a judgement call, and it’s a challenging instrument. It has risks too. It can go awry,” Patra added.
Patra said concerns of such a huge addition of liquidity in the system being inflationary is misplaced as the programme has been designed keeping in mind how much the economy can handle in terms of inflation and growth rate.
Markets reacted positively to the news, with the yield on the benchmark 10-year government bond falling 10 basis points from their intra-day high of 6.19%. “RBI is trying to flatten the yield curve by infusing liquidity at the longer end and repricing it at the shorter end. The longer end will therefore hold 6-6.25%, and the shorter end will move towards the repo rate of 4%. With the second lockdown, GST collections may be hit, and this may lead to additional borrowing. So, there is a bit of uncertainty, and that’s why RBI has announced it will do OMO and G-SAP to keep the market at ease,” said Rajeev P. Pawar, head of treasury at Ujjivan Small Finance Bank Ltd.
Meanwhile, RBI said it will continue to drain liquidity through variable rate reverse repo auctions with longer maturity.