Here’s What Else the RBI Can Do as Pandemic Rages on
A police officer walks past the Reserve Bank of India building in Mumbai. (Photographer: Kanishka Sonthalia/Bloomberg)

Here’s What Else the RBI Can Do as Pandemic Rages on

The Reserve Bank of India’s loan relief and liquidity injection plans unveiled Wednesday raise the question: What comes next as it seeks to ease the pandemic’s hit to Asia’s third-largest economy?

Benchmark rates have remained unchanged for a year amid sticky inflation, so the RBI has relied on a string of unorthodox policies. It’s embraced a Federal Reserve-style “‘Operation Twist” and an European Central Bank-style facility known as Targeted Longer-Term Refinancing Operations, as well as its own version of quantitative easing.

Here’s What Else the RBI Can Do as Pandemic Rages on

Here’s a look at what else Governor Shaktikanta Das can do as the pandemic rages on:

GSAP 2.0

The Government Securities Acquisition Programme, or GSAP, is the RBI’s version of quantitative easing -- when central banks buy up financial assets, mainly government bonds, to pump cash into the banking system. When Das introduced its 1 trillion-rupees ($13.5 billion) program last month, he hinted there might be more in store.

“We have announced the quantum for this quarter and there should be a surprise element too, for the second quarter,” Das had said last month. “It is not a one-off kind of announcement.”

Here’s What Else the RBI Can Do as Pandemic Rages on

The program helped lower bond yields, and has been successful in keeping overall borrowing costs in check despite stubborn inflationary expectations and doubts about the government’s ability to stick to its debt plan.

More Twists

As part of its efforts to control borrowing costs, the RBI resorted to its own version of Operation Twist -- selling short-term bonds while buying those longer-term to keep the yield-curve in a downward slope.

Das has repeatedly urged traders to treat the bond yield curve as a “public good” because of its impact on borrowing costs in the broader economy.

“With system liquidity assured, the RBI is now focusing on increasingly channelizing its liquidity operations to support growth impulses, especially at the grass-roots level,” he said Wednesday.

Here’s What Else the RBI Can Do as Pandemic Rages on

Loan Moratoriums

As regulator of the banking sector, the RBI can ease loan repayment rules, especially for sectors badly hit by the pandemic’s second wave such as tourism, hospitality, aviation and small-scale industry.

Kavita Chacko, an economist with Care Ratings Ltd., said there were expectations Wednesday’s announcements would include a loan moratorium.

“That is something that can be considered later on,” she said. “Then they can come up with measures to alleviate distress in segments that are most affected, even small businesses.”

Staying Accommodative

While its key policy rate has remained unchanged since mid-2020, the RBI’s Monetary Policy Committee is likely to maintain its easing bias until rate-setters are sure an economic recovery has started. Deputy Governor Michael Patra has said inflation pressures can be overlooked given weak demand, while his central bank colleague Mridul Saggar is convinced that the priority now is supporting growth.

That would allow policy makers to keep rates lower for longer, even if they don’t cut further.

“Rate cuts are unlikely at the moment unless the growth outlook deteriorates substantially,” said Rahul Bajoria, senior economist at Barclays Bank Plc in Mumbai. “So while the Monetary Policy Committee will keep a dovish bias, they are likely to rely on unconventional policies going forward.”

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