RBI taps into unconventional tools to revive growth

The Reserve Bank of India under the leadership of governor Shaktikanta Das has not ceased to surprise, both with its creativity in using unconventional tools and with the unambiguous nature of its actions. It not only showcased RBI’s commitment to support growth through monetary policy and measures to deploy credit to sectors that has multiplier effects on the economy, but it also reinstated its efforts to keep yields anchored by easing financial conditions and taking steps to ensure efficient transmission. Along with a request to the market to bid responsibly in government bond auctions, the policy has also taken some very strong measures to dispel any doubts regarding RBI’s commitment to ensuring lower rates. These measures took the shape of a) doubling the size of open market operations purchases in each auction to ₹20,000 crore, to ensure lower cut-off yields in the auctions and encourage offers at higher prices; b) extending the recently announced HTM limit hike to March 2022 that will help give confidence to banks to handle higher market risks from deploying higher liquidity in government bonds; c) announcement of OMOs in state development loans, which ensures the expanding borrowing programme of states do not lead to a rise in credit spreads. The new on-tap TLTRO scheme will increase liquidity for specific sectors, both via corporate bond markets and lending with the investment classified as HTM along with an exemption from large exposure framework.