ADVERTISEMENT

India Using Yield Curve Control as Rate Cuts Fail to Deliver

India’s central bank is actively managing bond yields to keep borrowing costs in check, analysts say.

India Using Yield Curve Control as Rate Cuts Fail to Deliver
A sign for the Reserve Bank of India (RBI) sign is displayed inside central bank’s headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

(Bloomberg) -- India’s central bank is actively managing bond yields to keep borrowing costs in check, analysts say, after five interest-rate cuts last year failed to spur lending in the economy.

The Reserve Bank of India’s recent shift to targeted cash injections and credit easing contrasts with the central bank’s insistence that it only looks to smoothen liquidity and facilitate the government’s market borrowing without targeting bond prices.

The steps, which began in December, will be ratcheted up next week, and is being seen as an attempt to curb yield steepening, which is a phenomenon where long-term yields rise more than shorter-tenor ones.

“India’s fiscal overhang, characterized by large public sector deficit and debt, creates a tendency for the yield curve to steepen. At a time when growth is well below potential, that is not desirable,” said Taimur Baig, chief economist at DBS Bank in Singapore. “Through the recently announced bond market operation measures, akin to LTRO and Operation Twist, the RBI is trying to more actively offset curve steepening.”

Despite the RBI being Asia’s most aggressive rate-cutter last year with 135 basis points of easing in the key rate, banks saddled with mounting bad debt have been hesitant to pass on those reductions to their customers.

RBI’s unconventional policy:
  • Last week, it announced longer term repos for 1- and 3-year at the policy rate in a bid to lower short-term yields
  • In mid-December, it adopted a U.S. Federal Reserve-like Operation Twist -- buying long-term bonds and simultaneously selling shorter tenor debt
  • In 2019, RBI did two forex swaps to inject rupee liquidity as against its usual tool of open market operations
  • In August, the RBI cut rate by an unconventional 35 basis points

The RBI’s measures will now exert a stronger influence over a large part of the yield curve and help lower borrowing costs, said Siddhartha Sanyal, chief economist at Bandhan Bank Ltd.

What Bloomberg’s Economists Say:

“An unintended benefit of the LTRO’s is to also pull down yields on short-tenure sovereign and corporate bonds. The RBI’s supply of funds for one- three-year maturities is now likely to serve as a benchmark for short-tenure bonds. Additionally, we think the RBI is likely to continue its operation twist to accommodate additional conversion of securities by the government in fiscal 2021.”

-- Abhishek Gupta, India economist

To read the full report, click here

Operation Twist wasn’t targeted at bond yields, RBI Governor Shaktikanta Das told reporters last week. The RBI holds multiple roles including deciding monetary policy, ensuring financial stability, and managing the government’s borrowing plan.

“It’s basically to facilitate monetary transmission to the corporate bond segment, not really to, sort of, do yield management for the government or supporting the government’s borrowing program,” Das said. “But as the debt manager of the government, the RBI always will have to ensure that the government borrowing program goes through in a very non-disruptive manner.”

To contact the reporters on this story: Anirban Nag in Mumbai at anag8@bloomberg.net;Subhadip Sircar in Mumbai at ssircar3@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, ;Tan Hwee Ann at hatan@bloomberg.net, Jeanette Rodrigues, Karthikeyan Sundaram

©2020 Bloomberg L.P.