India: RBI extends its QE programme – UOB

Economist at UOB Group Barnabas Gan and Senior FX Strategist Peter Chia evaluate the recent decision by the RBI to purchase further government securities.

Key Quotes

“The Reserve Bank of India (RBI) announced its decision to commit its balance sheet to the conduct of monetary policy via the purchase of government securities in the secondary market. The purchase programme, coined as G-sec acquisition or “G-SAP 1.0”, will see RBI purchases of INR 1 trillion (INR 1 lakh crore; US$13.4 billion) of government bonds in the first quarter of its fiscal year (1QFY2021/22). This compares to a total of INR3.1 trillion of bond purchase made in FY2020/21.”

“Beyond keeping its accommodative monetary policy stance in its latest monetary policy meeting, the decision to buy government bonds in the secondary market is seen to further anchor India’s economic recovery.”

“Noting that RBI did not provide any guidance for interest rate targeting, we believe that the key consideration for this programme is to ensure that yields do not face unnecessary volatility especially amidst the reflationary environment seen to-date. The commitment to purchase government bonds should also lower sovereign risk premium. However, the potential increase in public borrowing burden and/or increased money supply via money creation are effective drivers to pressure the INR weaker.”

“Formalizing a bond-purchase programme is a negative factor for the INR as it looks set to balloon India’s money growth further. As such, it is no surprise that that the INR has slumped over 1.5% to 74.56 per USD on the day of announcement (7- Apr), the biggest daily drop since August 2019. The bond-purchase programme adds to the other existing factors weighing on the INR which include downside risks to growth posed by the pandemic, India’s dual budget and current account deficits etc.”