RBI To Buy Government Bonds Through Open Market Operations

RBI’s Targeted Interventions Continue

Unlike other central banks, India’s monetary policy committee has not yet announced an emergency cut in its benchmark policy rate. The central bank has instead taken targeted measures to ensure that the local foreign exchange and money markets continue to function in an orderly manner.

Forex Swaps

Last week, the RBI announced that it will conduct a $2 billion sell/buy swap for dollar-rupee to ensure that there are no dollar shortages amid rising outflows. The first such swap was concluded on Monday. A second $2 billion swap auction is scheduled for March 23.

Long Term Repo Operations

The RBI has also extended its plan to conduct long term repo operations. The central bank had first announced Rs 1 lakh crore in LTROs at the time of its February policy review. The availability of this long term funding helped bring down corporate bond yields and led to a spurt in corporate debt issuances of close to Rs 57,000 crore.

On Monday, the RBI said it will infuse offer another Rs 1 lakh crore through LTROs in tranches. A first tranche of Rs 25,000 crore was auctioned on Monday but saw a relatively tepid response.

Open Market Operations

With the announcement of bond purchases under its open market operations, the RBI has opened a third front through which it will try to ensure that markets do not turn illiquidity and rates do not rise.

To be sure, the RBI has not announced the frequency of such operations or the extent to which it intends to buy government bonds.

Also Read: Coronavirus: The Economic Impact Of COVID-19 On India

What About Rate Cuts?

Earlier this week, RBI Governor Shaktikanta Das said that the central bank is not ruling out any measures but stayed away from giving any clear signal that an emergency rate cut is in the offing.

Still, most economists are now forecasting steeper-than-expected rate cuts in light of the anticipated weakness in GDP growth due to the spread of the coronavirus.

Also Read: Morgan Stanley, Goldman Declare Global Recession Under Way

“We expect the RBI MPC to cut rates by 25 basis points before/on April 3 with the FOMC cutting by 150 basis points. Second, it will likely cut again in June with inflation set to fall to its 2-6 percent mandate,” said Indranil Sen Gupta, chief India economist at Bank of America Securities in a note on Wednesday.