Unconventional monetary policy

Indian Economy glossary

Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT

Meaning

Unconventional monetary policy means tools beyond the usual one of changing the short-term policy rate. Central banks turn to it in two situations. The first is when rates are already at or near zero, called the zero lower bound or a liquidity trap, so they cannot be cut further. The second is when markets freeze, as in 2008 and 2020, and normal transmission breaks down. The main tools are:

  • Quantitative easing (QE): large-scale purchases of bonds.
  • Negative interest rates.
  • Yield curve control: targeting a specific long-term bond yield.
  • Operation Twist: buying long-term bonds while selling short-term ones.
  • Forward guidance: telling markets about the likely future path of policy.
  • Targeted lending schemes: cheap central bank funds tied to lending to specified sectors.
  • Helicopter money: giving new money directly to the public, permanently.

Example

The RBI used several of these tools. It ran Operation Twist-style special OMOs (Dec 2019-2020) and TLTROs (2020). Under G-SAP 1.0 and 2.0 (2021), it made ₹2.2 lakh crore of pre-committed purchases of government securities. G-SAP is often called India's "QE-lite".

Don't confuse with

  • Conventional monetary policy: conventional policy works by changing the short-term policy rate, such as the repo rate, and by routine liquidity operations.

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