Informist, Friday, Apr 9, 2021

Indians are experts at working with the resources at their disposal and coming up with the sort of life hacks which has given form to the word 'jugaad'. The Reserve Bank of India seems to be no exception, going by its new gilt purchase programme.

The first version of the gilt acquisition programme, or 'G-SAP 1.0', announced Wednesday, has drawn comparisons with the quantitative easing programmes launched by the US Federal Reserve and other major central banks in the aftermath of the global financial crisis. However, it is rather difficult to view it as anything but quantitative easing by 'jugaad'.

As a rather helpful note by the Federal Reserve Bank of St. Louis explains, quantitative easing looks to stimulate the economy by lowering long-term Treasury yields. And for there to be an appreciable impact on interest rates and the economy, quantitative easing requires large-scale asset purchases (the italics are the Federal Reserve Bank of St. Louis' own).

Even if the RBI does repeat the purchase of gilts worth 1 trln rupees it is scheduled to buy in Apr-Jun over the remaining three quarters of this financial year, it would perhaps not qualify as "large-scale" in the sense the Federal Reserve Bank of St. Louis meant it.

At 4 trln rupees, the asset purchase programme would constitute just under a third of the government's borrowing for the full year--or under 7.5% of the RBI's balance sheet as it was on Jun 30. In contrast, the Fed's balance sheet has expanded by 76% in the 12 months leading up to Mar 8.

Undoubtedly, comparing balance sheet operations of the Fed and the RBI is altogether unfair. But even the nature of the gilt purchase plan renders futile any comparisons with quantitative easing.

Stripped to its bare bones, the G-SAP is nothing more than a glorified OMO calendar. Yes, the commitment to buy bonds is a first. But that commitment had already been given on multiple occasions by Governor Shaktikanta Das in the last couple of months, who said the RBI will buy at least 3 trln rupees worth of bonds in the current financial year that started this month.

To be fair to the central bank, it has not been the one to compare the gilt purchase programme to quantitative easing; it is aware of its limitations on the balance sheet front and responsibilities regarding inflation and financial stability. It perhaps saw the opportunity to get a bigger bang for its buck and took it, putting together a plan within its constraints--the definition of 'jugaad'.

Market participants will do well to not confuse this with quantitative easing as we know it, for that can only lead to unrealistic expectations. 

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