The Reserve Bank of India (RBI) today took a step towards formalizing its own version of quantitative easing, committing to support the bond market through secondary market purchases, starting with 1 trillion rupees in the first quarter. Although the central bank has said this will be in addition to open market operations (OMOs), this is essentially a timeline for OMOs, a long-standing demand in the bond market.

The six-member monetary policy committee also unanimously voted a standstill on the benchmark rate “for as long as necessary to support growth on a sustainable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within target for the future.

The MPC has proposed a new policy toolkit called the “Aftermarket G-sec Acquisition Program”. or G-SAP 1.0. This is akin to existing open market operations (OMOs) whereby the RBI bought Rs 3.13 trillion net of bonds in the secondary market in the past fiscal year. G-SAP would be part of the overall liquidity management framework for the year, the RBI said.

The G-SAP program, which will begin on April 15 with the purchase of Rs 25,000 crore bonds, will allow a stable and orderly evolution of the yield curve, help the market to better plan its liquidity needs and ensure ” financial conditions conducive to the recovery to gain ground, ”said the governor of the RBI.

Deputy Governor Michael Patra added that such initial insurance “is very similar to what central banks do around the world where they buy assets of various types, except that the RBI buys the highest quality collateral under the form of government securities. ”.

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Deutsche Bank economist Kaushik Das called the program a “yield curve control” strategy that would continue over the next few quarters.

However, responding to a question from Business Standard, the RBI governor clarified that the central bank was not trying to lower yields, but provided a conducive environment for markets to do so.

“We are aware of all aspects of the liquidity situation and the maintenance of financial stability. There are many competing objectives that the central bank is required to manage, and there are trade-offs to be made. We’re pretty confident we’ll be able to strike a balanced tone and I think ultimately it’s a matter of judgment, ”Das said.

“G-SAP will almost serve the purpose of an OMO schedule, which has been on the bond market’s wish list for a long time,” said Siddhartha Sanyal, chief economist at Bandhan Bank.

The bond and rupee markets have shown opposite reactions to the policy.

Reacting favorably to the policy, 10-year bond yields fell as low as 6.06 percent, but closed at 6.08 percent, 4 basis points lower than its previous close. He finished the last fiscal year at 6.18 percent.

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The rupee fell more than 1.5% to close at 74.55 per dollar.

Forex traders say the RBI’s insistence on keeping rates low at a time of hardening yields in developed markets may have unwound some carry trades, as investing in India can seem relatively unattractive to foreign investors.

The central bank has kept its growth target virtually unchanged at 10.5% for the current fiscal year and has slightly modified the inflation forecast, adding that it expects inflation based on the price index at consumption (CPI) at 5% in the fourth quarter of 2020-2021. , 5.2 percent in the first quarter of the current fiscal year, 5.2 percent in the second quarter; 4.4% in the third quarter; and 5.1 percent in the fourth quarter with broadly balanced risks.

“The focus must now be on containing the spread of the virus as well as on economic recovery – consolidating the gains made so far and supporting the growth impulses in the new fiscal year (2021-22)” Das said in his policy statement. broadcast online.

Overall, national markets were satisfied with the policy.

“The RBI policy statement is a clear commitment to allay uncertainties in the market with guaranteed and continued liquidity support and explicit guidance for navigating through the current outbreak of Covid, the duration of which is uncertain,” said State Bank of India Chairman Dinesh Khara.

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However, a prolonged easy monetary policy carries inflation risks in the medium term. Household inflation expectations at 3 months and 1 year increased by 80 basis points (bps) and 10 bps respectively in the RBI survey of March 2021 on household inflation expectations. The Business Expectations Index showed more optimism, rising to 119.6 in Q1: 2021-22 from 114.1 in Q4: 2020-21.

According to HSBC, core inflation could remain high in the 5.5-6% range during FY22, which could remain sticky.

“High inflation and negative real rates can create their own distortions, such as encouraging investment in physical assets such as gold, which in turn can put pressure on external balances (via imports of gold high) and reduce potential growth, ”said Pranjul Bhandari, HSBC chief economist for India. adding that the RBI may gradually exit loose monetary policy towards the end of 2021 as the pandemic abates and the vaccination campaign reaches critical mass.

The RBI said it will also increase the reach of its Variable Rate Reverse Repo (VRRR) auctions with a longer term. “It is part of our liquidity management and should not be interpreted as a tightening of liquidity,” said the governor of the RBI. Targeted Long-Term Repurchase Transactions (TLTROs) will also continue until September 30 to help reduce the system’s liquidity needs. It ended on March 31.

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Among other measures to increase liquidity, the RBI extended the special liquidity facility for all Indian financial institutions such as Nabard, Sidbi, NHB and EXIM Bank.

The RBI said payment banks can now have an account balance of Rs 2 lakh, doubled from Rs 1 lakh earlier. The RBI will establish a Committee on Asset Reconstruction Companies (ARCs) to undertake a comprehensive review of the sector and recommend measures for their growth.

Banks can on-lend through non-bank entities until September 30 to meet their priority sector lending (PSL) targets. PSL loans against warehouse receipts were also increased to Rs 75 lakh, from Rs 50 lakh earlier. A financial inclusion index will also be developed by the RBI.

The central bank introduced certain measures in the payments space and allowed NBFCs, card networks and providers of prepaid instruments to access centralized payment systems such as RTGS and NEFT which were only used by retailers. banks.

Interoperability of prepaid payment instruments is now mandatory in policy.