Analysis: Unconventional For Others, Not So for RBI

By Sophia Rodrigues

Unconventional monetary policy has been one of the key themes of this year as market mulls what actions central banks, faced with the prospect of effective lower bound, take next year .

But one central bank has been at the forefront of unconventional monetary policy, almost normalizing unconventional to make it all look conventional. And it’s been doing it for many years.

That central bank is the Reserve Bank of India. Last week it put a new twist to its open market operations by simultaneously offering to buy 10-year government bonds and selling short-dated securities, prompting market watchers to call it an unconventional monetary policy and India’s version of “Operation Twist.”

However, aside from the simultaneous aspect of this operation, there is nothing unconventional about what the RBI is doing. The RBI has been using open market operations as a key monetary policy tool to adjust liquidity in the system, and on several occasions influencing government bond yields.

So, buying a 10-year bond now with the main aim of lowering its yield is not a new operation by the RBI. And neither is selling bonds.

The RBI’s announcement has been spurred by rise in government bond yields in recent weeks after the central bank, to the surprise of most, left key policy rates unchanged at the meeting earlier in the month. The rise in long-end yields led to an increase in the spread between the RBI’s policy rate and the benchmark 10-year yield to an above-average 160bps.

The RBI’s key aim appears to be to lower term spreads in the market by offering to purchase 10-year bonds and thus hope yields correct to a level that it sees as “desirable” or “appropriate.”

If the auction doesn’t lead to a desired outcome, it is likely the RBI will conduct more such operations in coming days.


The first time the RBI conducted open market buying of government bonds via an auction method to target yield levels was back in September 2001 in the aftermath of the 9/11 terror attacks in the U.S.

Back then, as a reporter with the Dow Jones Newswires, I wrote a story titled “India RBI innovates to steady bonds.”

It was indeed an innovation by the RBI then because providing liquidity to support the bond market wasn’t an effective solution because of the risk that it would lead to weaker rupee.

And it was one of the most successful innovations by the RBI and used often in the years to come.


It is interesting how the RBI has been so easily able to embrace what many now call “unconventional.”

Perhaps the compulsion to innovate stems from one of the many functions it undertakes.

Many may still be unaware that the RBI is also a merchant banker to the central and state governments. The borrowing requirements of these governments is huge and the RBI has an added responsibility to ensure these bonds are sold at a favorable price to the issuer and without disruption to the market.

The RBI’s open market purchases have played an effective role in the management of these auctions, where the central bank has infused liquidity during tight conditions, and influenced yield levels when they rose too much. During periods of too much liquidity that was expected to be durable, the RBI has done the opposite by soaking excess liquidity.