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Indian Central Bank ‘Stealth’ Support may lead to an Increased Level of Purchased Bonds

Indian Prime Minister Narendra Modi’s administration has signalled a possible winding back of it’s austerity-forward approach to India’s economy, following the raising of its borrowing target to $159 billion. This move was spotted by market participants rather than being directly announced, suggesting a possible ‘stealth’ approach to snapping up Indian government bonds.

DBS Bank Ltd’s Radhika Rao has suggested numerous possible approaches to supporting the Indian economy, including the aforementioned open-market purchase of bonds, and Federal Reserve style ‘Operation Twist’. Primary market purchases and possibly even private placements could be implemented.

The Reserve Bank of India (RBI) has not been able to directly purchase sovereign debt since April 2006, where a law was passed forbidding such an action. The need for one of the largest economies in Asia to weather the effects of the Coronavirus pandemic has led to a call for a softening of policy from even the original progenitors of the law. Advocates once against the RBI buying the nation’s debt in the past have recently joined the ever-growing list of advocates for more direct RBI involvement in helping the economy out amidst this pandemic.

“The RBI will be concerned about market stability to ensure yields don’t spike and hamper monetary transmission, We expect OMO purchases to be the preferred route.” - Shailendra Jhingan, chief executive officer at ICICI Securities Primary Dealership Ltd.

The current RBI share of the government debt is expected to rise above the current 15% holding which brings it closer to Australia’s 24%.

The RBI has not stated whether the additional borrowing is targeted at bridging the gap of recent lost revenue, or if the measures are aimed towards financing new spending.

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