RBI to infuse ₹1 lakh crore in Q1 to cap bond yields

The Reserve Bank of India (RBI) on Wednesday also committed to extending liquidity measures introduced last year by six months, further delaying an anticipated liquidity normalisation programme.

The Reserve Bank of India (RBI) announced a ₹1 lakh crore 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.

The delay in implementation by some stakeholders has given rise to a situation of possible large-scale consumer inconvenience and default, the RBI said.(Mint)

The RBI on Wednesday also committed to extending liquidity measures introduced last year by six months, further delaying an anticipated liquidity normalisation programme.

As part of the government security acquisition programme (G-SAP 1.0), the RBI will buy bonds worth 1 lakh crore from the secondary market in the three months to June 30, with the first purchase of ₹25,000 crore on April 15. The RBI has been under 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, the RBI bought ₹3.3 lakh crore worth of government securities through open market operations (OMO), which helped it manage a record ₹13.7 lakh crore government borrowing programme. The government plans to borrow ₹12.05 lakh crore 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 the RBI and action from the RBI have to be weighed together,” said governor Shaktikanta Das.

This is the first time the 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 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%. Traders said the announcement stopped bond yields from surging higher.

“The 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 the 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.