A lot of Central Banks are doing it to help the economy.
What Happened?
The Reserve Bank of India has bought bonds and treasury bills worth ₹14,660 crore in the second week of April alone. Before this bond buying, the central bank also bought bonds and treasury bills on April 6, 7 and 8th of the month.
In March, the US Federal Reserve pledged to buy government bonds in unlimited amounts. Also, the central bank, which stopped short of buying corporate debt during the 2008 financial crisis, has said that it will buy corporate bond exchange-traded funds in early May.
On April 27, the Bank of Japan pledged to buy the amount of bonds needed without limit.
In March, the European Central Bank unveiled plans to buy an extra €750 billion of bonds and issued a “no limits” commitment.
It is evident from the above statements that the central banks around the globe are serious about their bond buying programme. But how exactly does this help us?
The Act Called Bond Buying
The major role of central banks is to maintain a stable and growing economy and they achieve stability by using various tools. These tools help them during crises, such as the current Covid-19 crisis and one of these tools is buying or selling bonds.
When a central bank buys bonds in the open market, it increases the money supply in the economy. How? Because they buy the bonds from us in exchange for cash. So, now, they have injected liquidity in the market through their bond buying programme.
How Does Bond Buying Help An Economy?
Buying bonds help arrest the rise of bond yields. But why does this matter? If the yield offered by a bond is much higher than what it was when issued, there is a chance that the government that issued that bond is financially stressed and may not be able to repay the capital.
RBI, the central bank of India, also buys bonds to increase the money supply and encourage lending and investment. As we have mentioned earlier, when RBI buys bonds from us, new money gets added to the economy and it also helps lower interest rates by bidding up fixed-income securities.
In conclusion, every country’s central bank is trying to revive the economy by using various tools and we hope these help us weather the impact of the coronavirus pandemic in global economies.
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