In the context of Reserve Bank of India’s monetary policy, low bond yield regime could ensure better economic growth in the country. Do you agree with this view? Comment (200 Words)
Refer - Financial Express
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IAS Parliament 4 years
In the context of Reserve Bank of India’s monetary policy, low bond yield regime could ensure better economic growth in the country. Do you agree with this view? Comment
KEY POINTS
· RBI, in new G-Sec Acquisition Programme (G-SAP) and ‘unequivocally’ stated that ‘the Reserve Bank’s endeavour is to ensure orderly evolution of the yield curve.’
· It was adriven by the belief that lower yields would translate into higher investment and hence higher economic growth.
· At the same time, RBI has been conducting a series of ‘Operation Twists’ in a bid to reshape the GoI yield curve (plot of yields against maturity) in the hope that reshaping the yield curve would facilitate economic growth.
· GoI bonds are almost exclusively bought, held and traded by banks and other financial companies, mainly because of regulatory requirements like the statutory liquidity ratio (SLR).
· The secondary market in GoI bonds is huge, but it is still almost exclusively dominated by banks and financial companies.
· Given the much lower dependence on bonds, bond yields have little to do with the cost of debt capital for large companies and are unlikely to influence their investment decisions and economic growth. Hence the absence of a relationship between bond yields and economic growth.
· As regards yield curves, a study of the data shows that there no correlation between the shape of the yield curve (yields spread between one year and 10-year bonds) and GDP growth.
