RBI buys bonds in Indian version of QE

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The central bank supported its reinsurance by launching a G-sec Acquisition Program (G-SAP) by committing to purchase a specified quantum of bonds in the secondary market.

On Wednesday, the Reserve Bank of India (RBI) held down interest rates, warding off inflationary pressures, and said it would support the nascent recovery by remaining “ accommodating ” for as long as needed. RBI Governor Shaktikanta Das said the ‘accommodating’ stance would continue for as long as needed to ‘support growth on a sustainable basis and continue to mitigate the impact of Covid-19 on the economy ”.

The central bank supported its reinsurance by launching a G-sec Acquisition Program (G-SAP) by committing to purchase a specified quantum of bonds in the secondary market. The measure adds to other liquidity infusion tools like OMOs and Operation Twists, and the central bank’s explicitly accommodating tone reassured bond markets; bonds recovered well, with benchmark yields falling by around ten basis points. The first purchase worth Rs 1 lakh crore will take place in the first quarter of the fiscal year22 and Das has made it clear that it is not just one. “We intend to continue,” he said.

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The rupee fell sharply against the dollar on Wednesday as currency markets anticipate an increase in rupee liquidity following the RBI announcements. Experts, however, pointed out that the RBI had enough of a war chest in $ 580 billion in reserves to fight against dollar outflows.

The central bank has the heavy task of ensuring the realization of the vast borrowing program of the Center, of a gross crore of Rs 12 lakh more, for 2021-2022. Das reiterated the importance of limiting yields so that even companies can borrow at affordable rates and the recovery can gain momentum. While expressing concerns about the spike in infections and localized restrictions, the central bank left its GDP growth projection for FY22 unchanged at 10.5% although inflation projections were raised slightly; he expects CPI inflation to be above 4% in both fiscal years 22 (5%) and 23.

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Economists stressed that the still accommodating stance was not surprising given the many uncertainties and challenges that have arisen with the sharp resurgence in infections.

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