Special market ops can be useful for monetary policy transmission: RBI

RBI's special market operations such as Operation Twist (OT) and Long Term Repo Operations (LTRO) can be useful in facilitating monetary policy transmission when the regular transmission mechanism does not perform as expected, according to an article published in the central bank's bulletin.

The Reserve Bank of India (RBI) initiated two special market operations -- OT and LTRO since December 2019 and February 2020, respectively. They were designed to ensure comfortable liquidity in the financial system and to facilitate monetary policy transmission.

"Our analysis indicates that special operations such as OT and LTRO, which directly intervene in the bond market can be useful tools in facilitating transmission of monetary policy when the regular mechanism of transmission does not perform as expected," the article published in the RBI Bulletin for August said.

The article, prepared by Satadru Das, Saurabh Ghosh, and Vidya Kamate of the Strategic Research Unit, analysed the impact of these two sets of special operations on money and Government Securities (GSECs) markets.

OT involves buying of GSECs with longer-term maturities -- ten years and five years -- and selling of shorter-term GSECs of original/ residual maturities of one and three years.

LTROs are repurchase agreements collateralised by government securities, by which the central bank lends money to the banks for one to three years at the policy repo rate.

"As such, they would facilitate monetary transmission by reducing the cost of funds (in case of LTRO) and reducing the term premia (with OT)," the article said.

While the cost of funds channel may facilitate credit offtake, the reduction in the term premia may manifest through lower rates across the term structure of the financial market spectrum.

In totality, the objectives of both these operations is to ensure that comfortable liquidity is available to the system to facilitate the transmission of monetary policy, it said.

Another article titled 'Onshoring the Offshore', published in the bulletin, said that several currencies in recent years, particularly those of Emerging Market Economies (EMEs), have emerged as candidates for internationalisation.

The article has been prepared by Abhishek Kumar and Rituraj of Financial Markets Regulation Department, RBI.

As per the article, over the last three years, EME currencies' turnover, driven to an extent by the rise of Non-Deliverable Forwards (NDF) markets, outpaced global turnover in foreign exchange markets, boosting their global share.

"Among the EMEs, as per the BIS Triennial Central Bank Survey, 2019, trading in Indian Rupee (INR) has almost doubled in the last three years," it noted.

Recognising the linkages between onshore and offshore markets, and the possible impact of offshore markets on price discovery onshore, RBI is engaged in developing a deep and liquid onshore foreign exchange market, the article said.

The article also said RBI, in January 2020, also permitted exchanges in the GIFT City International Financial Services Centre (IFSC) to offer INR derivative contracts with settlement in foreign currency.

Banks in India were permitted by RBI to participate in NDF markets from June 1, 2020. Several banks have started participating in the market with a steady increase in average daily turnover by banks in India.

The volumes have been almost entirely concentrated in the interbank segment, although there are indications that interest from global funds and corporates is slowly growing, it said.

"The participation of Indian banks in the NDF market has increased avenues for interbank risk management and, going forward, could help bring down hedging cost for customers," it added.