The Reserve Bank of India (RBI) has announced a government securities acquisition programme (G-SAP) where it has committed to buy bonds worth £10 billion in the first quarter. This unprecedented step has been taken to keep interest rates in check to support growth, which RBI governor Shaktikanta Das said was paramount. The central bank’s announcement had the intended impact with the yield on the 10-year bond falling more than 11 basis points after the announcement to 6.07% from 6.18%.
This is not the same as the RBI using its balance sheet to support government borrowing. “Since bonds are being purchased from the secondary market, this would amount to monetisation of debt. On the contrary, monetisation of fiscal deficit, if it amounts to printing money in that particular year to finance it, is inflationary as it is effectively subscribing to the primary issuances of government,” said SBI group chief economist Soumya Kanti Ghosh. He added that monetisation of debt, however, may not be directly inflationary as it entails financing through Gsecs in secondary market and, if carried judiciously, is not inflationary particularly when there is over-capacity as in the current situation. “The RBI clarified that the G-SAP will run alongside other instruments, namely longer term repo/reverse repo auctions, forex operations, operation twist, and other open market operations. Given this, it is no surprise that bond yields have softened since the policy announcement,” HSBC chief economist Pranjul Bhandari said.
“The bond market was in a wait-and-watch mode going into FY22 to digest £12 billion of G-secs supply. With the explicit guidance now on the G-sec buying, supply concerns seem to have been addressed,” ICICI Securities said.
RBI deputy governor Michael Patra said, “This is the first time that the RBI is committing its balance sheet to conduct of monetary policy. It is different from open market operations where we announce the amount and the timing. We are giving up this discretion to give an assurance to markets. Giving a number enables participants to plan their actions accordingly.”
He added that it was a judgment call to announce a scheduled asset purchase and could go awry, but it was a challenge that the RBI has taken up. Internationally, central banks have been buying assets from banks as part of their quantitative easing programme. Patra said that the RBI chose to buy government bonds as it was the best quality asset, and the prices of government bonds have an impact on all credit markets.
