Table 5.

Unconventional Monetary Policy Measures

UMP Measure	Financial Indicators	Mechanism	Intermediate Goals	Application for India
Large scale asset purchases	Long-term yields Asset prices Financial system liquidity	Purchase of long-term government securities financed by crediting reserve accounts that commercial banks hold at the central bank, lowering government bond yields Induce sellers of government bonds to purchase riskier assets (e.g., corporate bonds), leading to lower cost of debt, i.e. reduction in relevant interest rates and higher asset prices Central banks can also purchase assets from the private sector Purchases lead to large increases in central banks’ balance sheets	Lower interest rates on risk-free assets (e.g., government securities) across different terms to maturity Lower interest rates across various markets Signaling device that policy rate will stay lower for longer and thus, stabilize interest rate expectations Easing financial conditions	Simultaneous buying and selling of long-term and short-term G-Secs have been used to ‘twist’ and flatten the yield curve (Operation Twist) in December 2019, January and April 20201
Lending operations	Credit growth Corporate yield spreads Financial system liquidity	Provision of liquidity to financial institutions through creation of new or extension of existing lending facilities Different from conventional lending due to looser or specific conditions, e.g., expanding set of eligible collateral, extending maturity of loan, provide funding at lower cost, channel lending to desired areas or activities with explicit conditions on loans	Increase credit flows to private sector Restart flow of credit to credit-starved sectors Lower borrowing costs for financial and real economy sectors Stabilize interest rate expectations Easing financial conditions	To augment credit flows to productive sectors at reasonable cost, RBI announced LTROs on Feb 6, 20202 TLTRO and TLTRO 2.0 were announced on Mar 27 & April 17, 2020 respectively to stimulate targeted lending wherein banks access liquidity at lower costs from RBI to be lent to targeted sectors.3 Provision of special refinance facilities to NABARD, SIDB and NHB were announced on April 17, 2020 to enable them to meet sectoral credit needs.4
Forward guidance	Policy Rate Stance of monetary policy Policy space	State central banks’ intentions and commitment regarding policy rate Typically, can be ‘time specific’ or ‘state specific’ Under time specific, central bank makes a commitment not to increase interest rates for a specified time period Under state specific, central bank maintains low rates until specific economic conditions are met	Signaling device that policy rate will stay lower for longer	RBI Governor and MPC resolution regularly offer forward guidance on the trajectory of policy direction, policy stance5 (accommodative, neutral and tightening) and policy space As an unconventional tool, RBI signals extraordinary policy actions for a longer duration
Negative interest rate	Policy Rate Long-term yields Financial conditions	Banks reduce their excess reserves by increasing lending and purchasing other financial assets	Adjustment of long-term yields downwards in line with expectations of future short-term rates Easing financial conditions	NA

Source: Author

The final goals of unconventional monetary policy are to boost economic growth and supplement conventional monetary policy tools especially during the easing cycle

¹See RBI Monetary Policy Report (MPR), April 2020 (RBI 2020d)

²Long Term Repo Operations, RBI Governor’s Statement, February 6, 2020; RBI MPR, April 2020 (RBI 2020a, d)

³Targeted Long-Term Repo Operations, RBI Governor’s Statement, March 27 and April, 17, 2020; RBI MPR, April 2020 (RBI 2020b, d, e)

⁴National Bank for Agriculture and Rural Development (NABARD), Small Industries Development Bank of India (SIDBI) and National Housing Bank (NHB), RBI Governor’s Statement, April 17, 2020 (RBI 2020e)

⁵Accommodative: interest rates stay the same or decrease; tightening: interest rates stay the same or increase: Neutral: interest rates can decrease, increase or stay the same