The challenge with any unconventional monetary policy is that it runs the risk of adverse effects when ended. This was the problem with the US Federal Reserve’s ‘quantitative easing’; when a rollback was expected in 2013, it precipitated the ‘taper tantrums’. It was similar, though very diluted, in India’s case when RBI spoke of rolling back the CRR-cut last year, which was interpreted as being the end of the easy-money. The recent announcements by RBI on further liquidity infusion leads to the question of whether this serves a broader purpose.
The QE in the US and the Eurozone saw central banks buy securities from banks to infuse liquidity and generate growth. The Fed’s balance-sheet swelled by $7.8 trillion, thanks to this, by April 2021. Where did this money go? Some got invested in the US, but there was the unintended consequence of funds flowing to emerging markets, and stock markets benefited everywhere. Therefore, when the taper tantrums started, the palpable concern was that there could be an exodus of funds, and the forex markets got jittery.
RBI’s QE is very different, and while the last financial year had the makings of a QE of the Fed variety, it turned out to be very different. QE last year came in the form of LTROs and TLTROs that were combined with OMO purchases to ensure that liquidity was made available to the banks.
LTROs were brought in before Covid struck, and there was issue of Rs 1.25-lakh-crore worth of these. In September, when banks were allowed to reverse these transactions, Rs 1.23 lkh crore of this amount was repaid to RBI. In case of TLTROs, there was a subscription of Rs 1.13 lakh crore. When RBI allowed reversals here, around Rs 37,000 cr was repaid. RBI started the on-tap LTROs in March 2021, and just Rs 5,000 crore flowed in. What does this mean?
First, it could have meant limited the interest in such easing, and the quantum of reversal meant that there was less use of these funds. Second, as the targeted LTRO was meant for specific sectors, there was not much flexibility given to the banks; this, in turn, meant the avenues for deployment were limited. Third, risk-aversion of the banks also meant that banks were worried about the uncertainty on the future of the moratorium announced as well as the possible spike in NPAs.
The curious part of this QE exercise was that all these measures were invoked at a time when there was surplus liquidity in the system. Starting March 24, 2020, RBI also carried out OMO purchases of Rs 5.5 lakh crore (offset with sales of Rs 1.94 lakh crore). Hence, there was a total liquidity infusion of almost Rs 7.8 lakh crore, with net infusion being around Rs 5.9 lakh crore. Now, this kind of infusion was done at a time when the surplus liquidity was going into the daily reverse repo auctions.
Hence, with RBI providing Rs 5.9 lakh crore broadly in net terms through the QE measures, around Rs 4.1 lakh crore was earning 3.35% while funding came at the lowest rate of 4% as the repo rate. Therefore, banks did not find it fit to hold on to the TLTRO/LTRO that was not deployed as it saddled them with a negative value of carriage.
What was the purpose served? The beneficiary was the government as the surplus liquidity in the system was used to support government-borrowing at a low cost. Therefore, the QE in our context has been beneficial to the government with a secondary impact on high-rated corporate bonds which are benchmarked against GSecs. However, bank rates followed an independent path.
The latest measures of RBI are meant to induce liquidity in the second wave of Covid, involving Rs 50,000 crore to the healthcare sector and Rs 10,000 crore to SFBs through SLTRO. But, the first auction had a dull response from SFBs. The winner again is the government as market had to finally acquiesce that the GSec yields should come down. The 10-year paper is now going at less-than-6%—a victory for RBI and the government.
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