India using yield curve control as rate cuts fail to deliver

Bloomberg

India’s central bank is actively managing bond yields to keep borrowing costs in check, analysts say, after five interest-rate cuts last year failed to spur lending in the economy.
The Reserve Bank of India’s (RBI) recent shift to targeted cash injections and credit easing contrasts with the central bank’s insistence that it only looks to smoothen liquidity and facilitate the government’s market borrowing without targeting bond prices.
The steps, which began in December, will be ratcheted up next week, and is being seen as an attempt to curb yield steepening, which is a phenomenon where long-term yields rise more than shorter-tenor ones.
“India’s fiscal overhang, characterised by large public sector deficit and debt, creates a tendency for the yield curve to steepen. At a time when growth is well below potential, that is not desirable,” said Taimur Baig, chief economist at DBS Bank in Singapore. “Through the recently announced bond market operation measures, akin to LTRO and Operation Twist, the RBI is trying to more actively offset curve steepening.”
Despite the RBI being Asia’s most aggressive rate-cutter last year with 135 basis points of easing in the key rate, banks saddled with mounting bad debt have been hesitant to pass on those reductions to the customers.
The RBI’s measures will now exert a stronger influence over a large part of the yield curve and help lower borrowing costs, said Siddhartha Sanyal, chief economist at Bandhan Bank Ltd.
“An unintended benefit of the LTRO’s is to also pull down yields on short-tenure sovereign and corporate bonds. The RBI’s supply of funds for one- three-year maturities is now likely to serve as a benchmark for short-tenure bonds. Additionally, we think the RBI is likely to continue its operation twist to accommodate additional conversion of securities by the government in fiscal 2021,” says Abhishek Gupta, India economist
Operation Twist wasn’t targeted at bond yields, RBI Governor Shaktikanta Das told reporters last week. The RBI holds multiple roles including deciding monetary policy, ensuring financial stability, and managing the government’s borrowing plan. “But as the debt manager of the government, the RBI always will have to ensure that the government borrowing programme goes through in a very non-disruptive manner.”

“It’s basically to facilitate monetary transmission to the corporate bond segment, not really to, sort of, do yield management for the government or supporting the government’s borrowing program,” Das said.