RBI May Resort To Bond Buying To Tame Yields
Money & Banking
The Reserve Bank of India (RBI) may adopt its own version of yield-curve control as it digs deeper into its toolbox to cushion the economy during the coronavirus pandemic, according to a unit of the country’s second-largest private lender.
The central bank may buy debt at irregular intervals to tame spikes in yields as it seeks to accelerate transmission of cuts in policy rates, breaking from the hard yield-control policies followed by the Bank of Japan and Reserve Bank of Australia, A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai, wrote in a report to clients.
The RBI may implement soft yield-curve control involving strong, sporadic interventions around specific thresholds, which may not be in keeping with any specific script, he said. The RBI would cap any sell-off in bonds but at the same time abstain from specifying any defined range or level.
Whether with the use of a Federal Reserve-style Operation Twist, the European Central Bank-like cash boost to banks and open-market debt purchases, the RBI has shown to be decisive in its quest to keep rates low. Still, the gap between the most-traded 2029 notes and two-year debt is near the widest in a decade, hindering the pass through of rate cuts.
The RBI may buy Rs 3 trillion to Rs 6 trillion ($79 billion) of bonds this fiscal year to implement its plan, Prasanna wrote. The authority has bought about Rs 1.2 trillion of debt since April 1, which has helped pull down yields on the 6.45% 2029 notes by more than 50 basis points since end-January.
The RBI should keep an intervention threshold very close to current market levels, said Prasanna. Actions reinforcing this premise would incentivize market participants to veer around to RBIs thinking.
Yield-curve control, a policy that involves purchasing, or selling, government bonds in order to target the yield on a specific maturity, has been used by Japan for years to boost economic activity and was recently adopted in Australia. Economists expect the U.S. to adopt the tool in coming months as policy makers seek to provide more support for businesses and households.
Published on
June 16, 2020
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The Reserve Bank of India (RBI) may adopt its own version of yield-curve control as it digs deeper into its toolbox to cushion the economy during the coronavirus pandemic, according to a unit of the country’s second-largest private lender.
The central bank may buy debt at irregular intervals to tame spikes in yields as it seeks to accelerate transmission of cuts in policy rates, breaking from the hard yield-control policies followed by the Bank of Japan and Reserve Bank of Australia, A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd. in Mumbai, wrote in a report to clients.
The RBI may implement soft yield-curve control involving strong, sporadic interventions around specific thresholds, which may not be in keeping with any specific script, he said. The RBI would cap any sell-off in bonds but at the same time abstain from specifying any defined range or level.
Whether with the use of a Federal Reserve-style Operation Twist, the European Central Bank-like cash boost to banks and open-market debt purchases, the RBI has shown to be decisive in its quest to keep rates low. Still, the gap between the most-traded 2029 notes and two-year debt is near the widest in a decade, hindering the pass through of rate cuts.
The RBI may buy Rs 3 trillion to Rs 6 trillion ($79 billion) of bonds this fiscal year to implement its plan, Prasanna wrote. The authority has bought about Rs 1.2 trillion of debt since April 1, which has helped pull down yields on the 6.45% 2029 notes by more than 50 basis points since end-January.
The RBI should keep an intervention threshold very close to current market levels, said Prasanna. Actions reinforcing this premise would incentivize market participants to veer around to RBIs thinking.
Yield-curve control, a policy that involves purchasing, or selling, government bonds in order to target the yield on a specific maturity, has been used by Japan for years to boost economic activity and was recently adopted in Australia. Economists expect the U.S. to adopt the tool in coming months as policy makers seek to provide more support for businesses and households.
Published on
A letter from the Editor
Dear Readers,
The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.
Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.
In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.
We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.
But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.
I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.
A little help from you can make a huge difference to the cause of quality journalism!
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