RBI's yield curve management

11 APR,2021 | MEDC


 

In its latest Monetary Policy Review, the RBI has taken a decidedly dovish stance and revealed its determination to flatten the yield curve. The RBI has announced that it will buy a trillion dollar worth of government bonds from the secondary markets in the first quarter of FY22. Committing the balance sheet of the RBI this way could backfire, but that is clearly a risk the Central Bank thinks is worth taking, if a long-term strategy for inflation and interest rate managementis to be formulated. The existing interest rate structure is unchanged, and that is a wise decisionin this environment of economic uncertainty. The second Covid wave has affected some key industrial states (including Maharashtra), and there are new risks to the economy. Now that fiscal dominance is back in a big way, the RBI is preferring to adopt a wait and watch approach. The Central Bank’s policy is largely accommodative in nature, and this stanceis likely to create an enabling environment for India’s financial ecosystem.

*Photo Credit: Google

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