RBI's new monetary trade-offs

The Monetary Policy of April suggested the Reserve Bank of India's (RBI) recent shift to an accommodative stance, repo rate cuts, and liquidity infusion measures, reflecting elements of unconventional policy in response to the global headwinds.

- ASHVIN PAREKH

Unconventional monetary policy (UMP) refers to central bank actions and go beyond standard tools like changing interest rates. The key unconventional tools include forward guidance, asset purchase, term funding facilities, operation twist, targeted long-term repo operations (TLTROs), and adjustments to market operations. In this article, we discuss the measures adopted by the RBI since the pandemic in rate transmission, liquidity infusion, currency stabilisation, and, in the recent past, its stance on economic growth support in the backdrop of tamed inflation. The benefits of the unconventional policy for the economy and some possible unintended consequences are also discussed.

It may be observed that the UMPs in Japan and the US differ from the RBI's approach, and each involves the central bank's balance sheet expansion. Japan's policy has focused on liability-side expansion, and the US one on asset-side approach.

The RBI has indeed used several unconventional tools in the past few policies. These include the operational twist where it has conducted special open market operations (OMOs) to manage long-term yields and improve monitoring transmission; long-term repo operations (LTROs) and TLTROs (where it has injected durable liquidity into the banking system); and supporting credit flow, liquidity infusion with the RBI injecting large amounts through bond purchases, forex swaps, and variable rate repo auctions, and—last but not the least—forward guidance where it has used communication to shape market expectations.