The concept proposed by Choudhary is similar to Operation Twist used by the US Federal Reserve in 2011-2012 in an effort to cheapen long-term borrowing and spur bank lending. The Fed then swapped short-term Treasury securities for longer-term government debt, which reduced the gap between two- and 10-year yields.
In India, the spread between the most-traded 10-year notes and two-year debt is the widest in nine years. That’s hindered the pass through of five rate cuts this year, frustrating efforts to revive the $2.7 trillion economy. Data last week showed gross domestic product fell below the 5 per cent rate for the first time in six years.
can buy bonds from the market to adjust the term spreads with a view to facilitate transmission,” said Choudhary. “Alternatively, it can buy medium- to long-end bonds and sell short-end bonds. These measures require conviction on the conceptual point of whether term spreads matter for transmission.”
The weak GDP print has also reinforced doubts about the government meeting its budget aim of 3.3 per cent of GDP this fiscal year as it continues to push for growth. That’s put long-tenor bonds under pressure despite the more than 3 trillion rupees ($42 billion) of excess liquidity in the banking system.
“There are enough people who fear that the fiscal lever will ultimately be deployed to boost growth even though there’s zero space,” said Choudhary. “If that were to happen, the yield curve can steepen further.”
The yield on benchmark 10-year bonds was little changed at 6.47 per cent on Wednesday. The yield spread between the most-traded 10-year notes to two-year debt is at 110 basis points, the highest since 2010.