Rbi does its bit to hold rates down

Rbi does its bit to hold rates down

The Reserve Bank of India (RBI) is twisting and turning to hold interest rates down. But lower rates will not, by themselves, produce growth. The government needs to policy-induce investment, lots of it. The central bank has been striving to rein in yields without changing policy rates. It has bought long-term government securities, that extra demand pushing up their price and lowering the yield, and simultaneously sold shorter-duration paper, so as to twist both ends of the yield curve in opposite directions. Operation Twist has been accompanied by an unchecked rise in the rupee’s exchange rate visà-vis the dollar.

When dollar inflows threaten to push up the exchange rate, RBI buys up the dollars, instead of letting the added supply push down the dollar’s value. So as to prevent the extra rupees released in the process from feeding inflation, RBI mops up the rupees, selling bonds. This additional supply of bonds lowers their price and pushes up yields. When the goal is to keep yields down, letting the rupee appreciate is an option. In theory, it could hurt exports, but given lacklustre export prospects in a contracting global economy, that is not a big risk, especially as the dollar has weakened against other major currencies. A stronger rupee would dampen inflation, as well: imports would be cheaper. On Wednesday, the benchmark 10-year bond yield was down 20 basis points from its Monday close of 6.12%.

RBI also has to manage borrowings of `12 lakh crore by the Centre, and of about `10 lakh crore by the states. RBI last week let a bond issue devolve, rather than accept the high rates demanded by investors, and raised the held-to-maturity quantum of bonds for banks, to induce them to buy more bonds. Such measures do credit to RBI. Now, it is up to the government.