I thought monetary policy meetings were all about adjusting policy rates to ensure that inflation behaved itself. But lately, India’s monetary policy meetings are going all over the place with TLTRO, Operation Twist, G-SAP 1.0 and what not. Where exactly are they going with all this?

No central bank or rate-setting authority in a country can afford to watch just one variable. In India, though the Monetary Policy Committee’s mandate is supposed to be inflation targeting, it does keep an eye out for growth and how the currency is behaving. Since the economy is recuperating from the pandemic, the RBI has been announcing additional liquidity measures to ensure that the banks loosen their purse strings and needy segments of the economy get credit at reasonable rates.

The TLTRO or Targeted Long Term Repo Operation, for instance, allowed banks to borrow money from the RBI at the repo rate to lend to companies and NBFCs. Operation Twist saw the RBI buying up long-term government bonds and selling short-term ones so that borrowing costs didn’t go up.

With G-SAP 1.0 or the new Government Securities Acquisition Programme, the RBI has announced an advance calendar for purchasing G-secs. It hopes that with this purchase, yields on long term G-secs, which had spiked beyond 6 per cent in the last couple of months, will cool down.

You make it sound as if the RBI is doing all this out of altruism. But there’s a tiny vested interest too, isn’t it? When the RBI buys G-secs and calls it Operation Twist or G-SAP 1.0 or whatever, this helps the government borrow cheap.

That’s right. When the RBI promises to take older G-secs off the hands of bond market participants, it does two things. It creates room for these players to buy new bonds in future auctions. It is also telling the market that if bond prices fall (and yields rise), it will step in to support them.

Apart from being the key rate-setting authority, the RBI also happens to be in-charge of ensuring that government borrowings go through smoothly. With the Central government looking to borrow over ₹12 lakh crore in FY22 to meet the economy’s special needs post-Covid, the RBI seems to be giving it a bit of a helping hand.

There’s conflict of interest there, isn’t it? After all, all this G-sec buying pumps a lot of liquidity into the market and that can fuel inflation. But the RBI is also supposed to be the economy’s watchdog on inflation. When there’s too much money sloshing around causing price rise, it’s supposed to quell it by hiking interest rates.

Spot on. Expert committees and central bankers have in fact pointed out this conflict between the RBI’s role as inflation warrior and that as enabler of government borrowings. But the RBI is also in-charge of financial stability. So its official line is that the G-SAP programme is meant to ensure there’s an ‘orderly evolution of the yield curve’, whatever that means.

That’s just euphemism for the RBI wanting to keep government borrowing costs in a desired band.

Hmm, it’s true that a taper tantrum-like situation, where market interest rates suddenly jump up by 200 basis points, threatens financial stability. But then, recent G-sec auctions have been devolving because buyers are bidding at higher yields which the RBI doesn’t want to concede. So, it’s a mix of the two.

How I wish I had someone to keep my interest rates in check, as I run up big credit card bills!

That’s one of the special privileges of being the sovereign.

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