Indian Economic Review (2023) 58 (Suppl 2):S261–S291

https://doi.org/10.1007/s41775-023-00171-2

ARTICLE

Impact of RBI’s monetary policy announcements

on government bond yields: evidence from the pandemic

Aeimit Lakdawala1 · Bhanu Pratap2 · Rajeswari Sengupta3

Accepted: 4 April 2023 / Published online: 20 May 2023

© The Author(s) under exclusive licence to Editorial Office, Indian Economic Review 2023

Abstract
We investigate how the bond market responded to the Reserve Bank of India’s (RBI)
monetary policy actions undertaken since the start of the pandemic. Our approach
involves combining a narrative analysis of the media coverage together with an
event-study framework around RBI’s monetary policy announcements. We find that
the RBI’s actions early in the pandemic were helpful in providing an expansionary
impulse to the bond market. Specifically, long-term bond interest rates would have
been meaningfully higher in the early months of the pandemic if not for the actions
undertaken by the RBI. These actions involved unconventional policies providing
liquidity support and asset purchases. We find that some of the unconventional
monetary policy actions had a substantial signaling channel component where the
market perceived the announcement of an unconventional monetary policy action as
representing a lower future path for the short-term policy rate. We also find that the
RBI’s forward guidance was more effective in the pandemic than it had been in the
couple of years preceding the pandemic.

Keywords Monetary Policy, Reserve Bank of India · Unconventional Monetary

Policy · Bond Yields · Forward Guidance · Pandemic

JEL Classification E44 · E52 · E58 · G10

* Bhanu Pratap
[email protected]
Aeimit Lakdawala
[email protected]
Rajeswari Sengupta
[email protected]
1
Wake Forest University, Winston‑Salem, NC, USA
2
Reserve Bank of India, Mumbai, India
3
Indira Gandhi Institute of Development Research, Mumbai, India

13
Vol.:(0123456789)
S262 A. Lakdawala et al.

1 Introduction

Major central banks all over the world resorted to a wide variety of policy
actions to provide much-needed support to their respective economies that were
severely impacted by the Covid-19 pandemic. These ranged from conventional
monetary policy (CMP) actions such as reductions in the short-term interest rates
to unconventional announcements such as extended lending programmes, asset
purchases and forward guidance. The primary objective of these actions was to
inject liquidity into the system and maintain the orderly flow of credit from financial
intermediaries to the real economy. With the pandemic having subsided and the
same central banks trying to exit the policies of abundant liquidity injection, it is
now worthwhile to investigate the impact of these monetary policy actions on the
financial markets. Against this background, in this paper, we empirically analyze the
bond market impact of the conventional and unconventional monetary policy actions
announced by the Reserve Bank of India (RBI) since the beginning of the pandemic.
We focus on the bond market as it is one of the most important links in the overall
monetary transmission mechanism.1
India offers an interesting case study to examine this issue for two main reasons.
While in the developed countries, governments announced massive fiscal stimulus
packages in the wake of the pandemic to stimulate demand, in India, much of the
heavy lifting was done by the RBI. Given the limited fiscal space (fiscal deficit of the
central and state governments in the pre-pandemic period was close to 10 percent of
GDP), the fiscal responses of the government were mostly restricted to providing
relief measures to the disadvantaged sections of the Indian population. This led to
considerable expectations in the financial markets that the RBI would provide the
necessary support to the formal sector of the economy including both financial and
non-financial firms.
Second, the RBI which had formally adopted inflation targeting in 2016, had
not resorted to unconventional monetary policy (UMP) actions in as big a way as
for example the US Federal Reserve or the European Central Bank at any point of
time in the pre-pandemic period.2 This makes a study of the RBI’s pandemic-time
actions even more interesting.3 Not only did the RBI undertake different types of
UMP actions they also provided explicit forward guidance during the pandemic to
anchor the expectations of the market participants. The objective of the conventional
as well UMP actions was manifold including, aiming to improve monetary policy
transmission, facilitating credit flow from banks to the rest of the economy, easing

1
During the pandemic, the growth rate of non-food bank credit fell dramatically (to six decades low
of around 5–6 percent) owing to heightened risk aversion in the banking sector, and hence transmission
through this channel was seriously impaired.
2
Only exception being the usage of Operation Twist since December 2019 and the announcement of
Long-term repo operations in February 2020.
3
The official inflation target in India has been fixed at 4% headline CPI inflation with a ± 2% band on
either side. As Appendix Figure 5 shows, barring a brief spell in 2021, headline inflation has been con-
sistently above the 6% upper threshold of the inflation targeting band in recent years. Even in 2021, infla-
tion remained closer to the upper threshold rather than the target level of 4%. One-year ahead inflation
expectations were also above the target level during our sample period.

13
Monetary policy announcements and bond yields in the pandemic S263

liquidity constraints in specific sectors, reducing financial stress in markets and

maintaining financial stability (Patra & Bhattacharya, 2022).
Moreover, anecdotally another important goal seemed to be to keep the
government’s borrowing costs in check. During the pandemic the Indian
government’s debt-to-GDP ratio reached close to 90 percent of GDP implying
unprecedented levels of borrowing by the government from the bond market. As a
result, one of the main objectives of the RBI’s UMP announcements arguably was
to lower the bond yields to support the government borrowing program. This was
alluded to several times in the RBI’s official statements as well.4
Our paper makes three main contributions in studying the bond market response
to RBI’s pandemic-era monetary policy announcements. First, we study the media
reactions to some of the major monetary policy announcements during our sample
period which runs from March 2020 to June 2022. While using the change in
financial market prices is a natural alternative to study the response to central bank
announcements (and we also do this later in the paper), the narrative analysis using
media articles allows us to provide more context in understanding the impact of
these announcements. This is a novel aspect of our paper relative to the existing
literature that analyzes the pandemic policy announcements of the RBI (see for
example Patra & Bhattacharya, 2022; Talwar et al., 2021). Overall, we find that the
narrative in the media is consistent with the financial market price changes. Both
sources suggest that only a handful of the UMP actions and especially those in the
early part of the pandemic took the markets by surprise. For instance, the market
seems to have been more surprised by the first announcement of the Targeted Long-
Term Repo Operations (TLTRO) (both in March and April) and the Operation Twist
(OT) announcement in April. However, we do not find much of an effect of the
GSAP (Government security acquisition program) announcements that happened
more than a year into the pandemic in April and June 2021. For the conventional
announcements, the markets seem to have been most surprised when the RBI began
tightening monetary policy by raising the policy interest rates in the period from
April to June 2022 in response to elevated inflation levels.
Second, we undertake a systematic investigation of how and why RBI
announcements moved government bond yields since the start of the pandemic,
focusing on both conventional and UMP announcements.5 The total effect of the
RBI’s surprise announcements in the first one and a half years of the pandemic was
to reduce the yield on 10-year government securities (GSec) by at least 40 basis

4
See for example the RBI Governor’s statement of October 9, 2020: “As the monetary policy author-
ity with the responsibilities for development and regulation of financial markets and the management of
public debt, the RBI has prioritised the orderly functioning of markets and financial institutions, easing
of financing conditions and the provision of adequate system-level as well as targeted liquidity. This is
important from the point of view of smooth and seamless transmission of monetary policy impulses as
well as the completion of market borrowing programmes of the centre and states in a non-disruptive
manner with a normal evolution of the yield curve. Since February 2020, the RBI has taken a series of
measures in this direction.”
5
We restrict our analysis to government bonds in this study. Ideally, we would have liked to analyse the
response of the corporate bond yields as well, but in India, the secondary market for corporate bonds is
highly illiquid with the average daily trading volume less than 1 percent of the total outstanding bonds.

13
S264 A. Lakdawala et al.

points. This accounts for the total fall in the 10-year GSec during that time. This
effect was driven both by conventional and UMP actions. Consistent with the
narrative analysis, we find that only 5 announcement dates, all in the first few months
of the pandemic were responsible for the cumulative 40 bps fall in the 10-year yield.
Four of these dates contained UMP announcements, such as TLTRO and Operation
Twist (OT). Notably, the GSAP measures announced by the RBI in April and June
2021, during the second wave of the pandemic did not have any discernible impact
on the bond yields. In other words, much of the impact of the RBI’s announcements
was front-loaded in the first six months of the pandemic.
We also investigate if there are any indirect effects of the UMP announcements.
We find evidence of the TLTRO announcements working through a signaling
channel (see for eg., Bauer & Rudebusch, 2014). The idea behind this channel is
that markets perceive the announcement of an unconventional monetary policy by
the central banks as a signal to keep short-term interest rates lower in the future. We
explore this channel using data from Overnight Indexed Swap (OIS) rates. While
TLTRO announcements had a pronounced signaling channel effect of lowering short
to medium-term interest rates, we do not find this for the other UMP actions.
Finally, we assess the potential impact of the RBI’s forward guidance on the
bond markets. The RBI traditionally did not offer forward guidance (Lakdawala
& Sengupta, 2021; Mathur & Sengupta, 2019) as part of its monetary policy
statements. However, during the pandemic forward guidance gained prominence
in the RBI’s communication strategy (Talwar et al., 2021) primarily to reiterate the
accommodative stance of monetary policy. We use OIS rates and the approach of
Gürkaynak et al., (2005) to construct target and path factors which captures surprise
changes to the short-term policy rate and surprise movements in the medium-term
rates, respectively. Specifically, the path factor moves in response to surprise changes
in the RBI’s forward guidance. We find that forward guidance shocks continued to
have an expansionary effect on longer term rates not only in the first year of the
pandemic but through early 2022. The biggest path factor movements however came
about in 2022 when the RBI began tightening monetary policy to tackle high and
rising inflation.6 We also find that while in the pre-pandemic period, the target factor
was the main driver for bond yields, in the pandemic period, the path factor was
more important. This underscores the importance of the RBI’s forward guidance
over the last two years.
While there exist by now several studies that analyze the impact of monetary
policy actions particularly UMP announcements on bond markets (for e.g.,
Rebucci et al., 2022), to the best of our knowledge there is only a limited literature
on this topic for emerging economies like India especially for the pandemic
period (notable exceptions are Das et al., 2020a, Patra & Bhattacharya, 2022 and
Talwar et al., 2021). We address this gap and contribute to this nascent literature
by conducting a narrative analysis using media reports which enables us to study

6
With the shift in focus of the RBI to inflation stabilization in the later part of the pandemic, it is natural
to wonder if this changed the monetary transmission mechanism. However, due to a short sample, we do
not test if the monetary transmission of target and path factors to bond yields changed but it is an inter-
esting question left for future research.

13
Monetary policy announcements and bond yields in the pandemic S265

market’s reactions to the announcements and also by looking at both expansionary

and contractionary announcements by the RBI. Our paper is also related to the
broader strand of India-focused empirical literature that analyses the impact of the
RBI’s announcements on financial markets.7 The rest of the paper is organized as
follows. In Sect. 2, we describe various monetary policy actions undertaken by the
RBI during the pandemic and discuss the media coverage around some of the major
announcements. We analyze the bond market response to both unconventional and
conventional monetary policy announcements in Sect. 3 followed by an analysis
of RBI’s forward guidance policies during the pandemic in Sect. 4. We conclude
the paper in Sect. 5 by drawing policy implications for the design and conduct of
monetary policy in the future.

2 Monetary announcements during pandemic and market reactions

The RBI announced a slew of conventional and unconventional monetary policy

(UMP) measures during the pandemic. Conventional measure refers to changes
in the short-term policy rate (i.e., repo rate). According to the inflation targeting
mandate of the RBI the monetary policy committee (MPC) is responsible for
deciding the policy repo rate. As per the RBI’s liquidity management framework,
the repo rate lies in a corridor (referred to as the Liquidity Adjustment Facility
or LAF corridor) whose floor is decided by the reverse repo rate and the ceiling
is decided by the marginal standing facility (MSF) rate (Dua, 2020). This corridor
used to have a fixed width in the pre-pandemic period implying that once the MPC
decided the repo rate, the other two rates were automatically determined. Till the
pandemic, the reverse repo rate had never been changed in isolation by the RBI.
However, during the pandemic, on April 17, 2020 the RBI cut the reverse repo rate
by 25 basis points (bps) without changing the repo rate, as a result of which the LAF
corridor became asymmetric with a downward bias. This was done predominantly to
discourage the banks to park their excess liquidity with the RBI. However, this move
would be considered an UMP action because it was not part of the conventional
monetary policy statement of the MPC and did not entail a change in the policy rate.
In addition to this, the RBI announced several other UMP actions during the
pandemic which we have described in the Appendix in Table 6 and Table 7.
The rationale and the nature of the policy actions, the transmission channels and
the scale of operations are considered the main distinguishing features of UMP
announcements (BIS, 2019; Patra & Bhattacharya, 2022). RBI undertook three main
types of UMP actions, namely TLTRO, Operation Twist and G-SAP. TLTRO was
introduced to provide liquidity to specific sectors and entities experiencing liquidity
stress (Talwar et al, 2021). Operation Twist (OT) was aimed at compressing the term
premium and flattening the yield curve. G-SAP was an upfront commitment by the
RBI on the size of GSec purchases in contrast to the regular discretionary purchases
through open market operations (Patra & Bhattacharya, 2022).

7
See for example Agarwal (2007), Sasidharan (2009), Prabu et al. (2016), Khuntia and Hiremath
(2019), Das et al., (2020b), Lakdawala and Sengupta (2021) and Ahmed et al. (2022)

13
S266 A. Lakdawala et al.

In this section, we describe a few of the major announcements and analyze the
financial market’s reaction to these announcements as understood from articles
published in the Economic Times (henceforth ET), a leading financial daily in India.
We list some of the major announcement dates during our sample period in Table 1.
The announcement of the nationwide lockdown on March 27, 2020 was followed
by the Finance Minister announcing a fiscal package of Rs. 1.7 lakh crore on March
26, 2020. The market viewed this mostly as a relief package for the country’s poor
in the wake of lockdown, without any demand stimulus per se, or any relief for the
industry, including the hardest hit sectors such as aviation, and hospitality among
others. This created some expectation that the RBI would announce some major
policy actions to provide much needed support to the economy.
The RBI preponed its scheduled monetary policy meeting from April to March
2020. On March 27, 2020, in keeping with the expectations, in an unscheduled
monetary policy announcement, the RBI announced a big expansion in monetary
policy. This included a 75 basis points (bps) cut in the policy repo rate, a 90 bps cut
in the reverse repo rate, and a 1 percent reduction in the cash reserve ratio (CRR).
Simultaneously, the RBI announced an unconventional monetary policy in the
form of the TLTRO (Targeted Long-Term Repo Operation or repurchase operation
in government securities). While the RBI had been doing LTRO (Long-term repo
operations) since February 2020 to improve monetary policy transmission, this was
the first time it announced a targeted version of this program. The idea was that
the banks would use the liquidity available under this scheme to invest in corporate
bonds or commercial paper or debentures, and this would keep credit flowing in the
economy. These announcements together were meant to inject Rs 3.74 lakh crore
liquidity in the system, which amounted to about 1.8 percent of India’s GDP.
The RBI’s announcement came at a time when the market was already expecting
a considerable monetary policy support given the shock of the pandemic and
the lockdown. At the same time, in some quarters, the magnitude and variety of
measures announced may have led to some element of surprise. For example, some
analysts noted that “The RBI has surpassed expectations by delivering more than
what the market anticipated, and its promise to ’do whatever it takes’ has come
good.”8
Over the next couple of weeks, the RBI announced more TLTRO auctions.
While these announcements were lauded by the analysts and markets in general, the
overarching sentiment seemed to be that the government was not going to announce
a sizeable fiscal stimulus because of constrained fiscal space, and hence the RBI
would have to do much of the heavy lifting; however, the measures announced by the
RBI did not seem adequate or appropriately targeted. For example, market expected
the RBI to follow the footsteps of the US Federal Reserve, and directly start buying
corporate bonds. The ET reported on April 15, 2020: “RBI, which has been reluctant
in following the sweeping actions of Federal Reserve, could use Sec 17 of the RBI Act
to extend bond purchases to include corporate bonds with sufficient haircuts.”9
8
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corona-​crisis-​heres-​what-​exper​ts-​say/​artic​leshow/​74841​412.​cms.
9
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leshow/​75150​864.​cms.

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Monetary policy announcements and bond yields in the pandemic S267

Table 1  Major Monetary Policy Announcements during the Pandemic

Date Policy Type Details

March 27, 2020 Both CMP and UMP Repo rate was cut by 75 bps to 4.4%; Reverse repo rate was cut
by 90 bps to 4%; CRR was cut by 1%; TLTRO 1.0 announced
March 30, 2020 UMP TLTRO next tranche announced
April 17, 2020 UMP Reverse repo rate cut by 25 bps to 3.75%; TLTRO 2.0
announced
April 23, 2020 UMP Operation Twist announced
May 22, 2020 CMP Repo rate cut by 40 bps to 4%; Reverse repo rate down to
3.35%
April 07, 2021 UMP GSAP announced for the first time
April 08, 2022 CMP RBI hikes Standing Deposit Facility rate (new floor of LAF
corridor) to 3.75% from 3.35%
May 04, 2022 CMP RBI increases repo rate by 40 bps to 4.4%

The above table shows some of the major monetary policy announcements during our sample period
from March 2020 to June 2022. CMP refers to conventional monetary policy announcements while UMP
refers to unconventional monetary policy announcements. CRR refers to the cash reserve ratio. Source:
Reserve Bank of India (URL: www.​rbi.​org.​in)

There were also fears that given the high fiscal deficit of the government on
account of reduction in tax revenues triggered by the lockdown, the government
would need to significantly increase its borrowing from the market and this could
push up bond yields. This led to expectations that the RBI would need to do more
to keep the bond yields in check and support the government’s borrowing program.
“The RBI should consider another package of wide ranging measures…….The
growth impact from Covid-19 due to required measures such as the lockdown, will
require active support from the RBI to ensure that Government borrowing for the
current financial year is conducted smoothly (ET, April 15, 2020)”.
Almost in response to the market’s concerns, the RBI announced TLTRO 2.0 on
April 17, 2020 along with a 25 bps reduction in the reverse repo rate, in yet another
unscheduled announcement. The disruptions caused by the pandemic, severely
and perhaps disproportionately, impacted the small and mid-sized corporations,
including non-banking financial companies (NBFCs) and microfinance institutions
(MFIs), in terms of access to liquidity. Yet majority of the funds available by the
banking sector through TLTRO 1.0 (announced on March 27, 2020) was deployed to
buy bonds issued by public sector entities and large corporations. Hence, to support
the more disadvantaged sections of the economy, the main idea behind TLTRO 2.0
was that the funds availed by banks under this scheme were to be invested in bonds
issued by NBFCs, with at least 50 per cent of the total amount availed going to small
and mid-sized NBFCs and MFIs.
This unscheduled announcement came as a surprise. ET reported on April 17,
2020: “In a surprise second media briefing in a month, RBI Governor Shaktikanta
Das on Friday noted that the deployment of targeted TLTRO 1.0 largely went to
large PSUs (public sector undertakings) or large corporations. To begin with, the

13
S268 A. Lakdawala et al.

central bank will conduct TLTRO 2.0 worth Rs 50,000 crore.”10 This announcement
also led to expectations that the RBI would undertake further interest rate reductions
in the next meeting. “India’s central bank governor laid the ground for more interest
rate cuts as he took a number of steps to boost liquidity and support lenders” (ET,
April 17, 2020).11
The other major UMP announcement by the RBI in April 2020 was that of
the Operation Twist (OT). This specific type of UMP, which was a variant of the
quantitative easing used by the US Fed in 2012, had been done earlier by the RBI
in December 2019. During the pandemic period, RBI announced the first OT on
April 23, 2020. The objective of this UMP action was to alter the slope of the yield
curve through targeted intervention at specific maturities (Patra & Bhattacharya,
2022), and primarily to lower the yields on long-term GSecs. This announcement
led to nearly 16 bps drop in the 10-year GSec yield, the biggest drop since March
27, 2020. Bond markets interpreted this announcement as an indirect signal of the
RBI’s intention to monetise part of the government’s fiscal deficit. Given that the
RBI had not engaged in deficit monetisation for decades, the nature of this specific
OT announcement seemed to surprise the markets. “While the RBI earlier this year
conducted similar "twist operations", Thursday’s announcement raised eyebrows as
the RBI will now be selling T-bills it sold in an auction a day earlier, in what traders
say is a clear indication the RBI itself bought a large chunk of that offering.”12
The next set of conventional monetary policy announcements were done on May
22, 2020 when the RBI slashed the policy repo rate by another 40 bps to bring it
down to the lowest ever rate of 4 percent; accordingly, the reverse repo rate came
down from 3.75 percent to 3.35 percent. With this, the RBI cut the repo rate by 115
bps and the reverse repo rate by 155 bps in the first two months of the lockdown.
This marked the end of the rate cutting cycle during the pandemic. Given the
continuing troubles in the economy amidst the protracted and severe lockdown,
the reaction of the market to this round of monetary expansion was lukewarm. ET
reported on May 22, “However, while the monetary policy measures announced
today are certainly necessary, they can hardly be deemed to be sufficient, in the
face of severely weakened demand conditions economy-wide, following two entire
months of severe economic lockdown.”13
The next significant UMP announcement by the RBI took place on October 9,
2020 when the RBI unveiled the on-tap TLTRO scheme. The focus of this scheme
was revival of activity in specific sectors that have both backward and forward link-
ages, and multiplier effects on growth. Initially, this scheme was meant for five

10
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much-​needed-​move/​artic​leshow/​75197​723.​cms.
11
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artic​leshow/​75206​649.​cms.
12
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bonds-​rally/​artic​leshow/​75327​136.​cms.
13
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do-​more/​artic​leshow/​75895​544.​cms.

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Monetary policy announcements and bond yields in the pandemic S269

sectors; subsequently 26 stressed sectors were brought under this ambit by Decem-
ber 2020, and by February 2021 the NBFCs were also included i.e., liquidity availed
by banks through this scheme was to be deployed to buy bonds from entities in these
sectors as well as lend to these specified sectors. The market expectation in the run-
up to this monetary policy meeting was that status quo would be maintained. “The
newly-constituted Monetary Policy Committee (MPC) of the Reserve Bank began
its three-day deliberations on Wednesday, amid expectations that the central bank
will maintain status quo on the benchmark lending rates in view of hardening infla-
tion. Industry bodies are of the view that the RBI should maintain its accommoda-
tive stance on the policy interest rates in the wake of serious challenges in limiting
contraction in the economy due to COVID-19 pandemic” (ET, October 7, 2020).14
There was no expectation per se of further liquidity injection measures and
hence the market reaction in general was that the RBI had done more than what was
expected. This was also when the RBI and the monetary policy committee (MPC)
gave an explicit forward guidance about the future path of monetary policy. We dis-
cuss this in greater detail in the next section.
The RBI announced G-SAP on April 7, 2021 marking the first time the central
bank pre-committed to a specific size of GSec purchases. This was on the lines of
US Fed’s Large-Scale Asset Purchases (L-SAP) programme after the implosion of
Lehman Brothers. Between April and June 2020, the central bank said it would aim
to buy Rs. 1.0 lakh crore bonds under G-SAP. To a large extent, this was expected
by the financial markets. After the Finance Minister announced a massive borrowing
(Rs. 12.05 lakh crore) plan for 2021–22 in the Union Budget of February 01, 2021,
bond yields began hardening. There was widespread expectation in the market that
the RBI would provide some clarity about its GSec purchase plan for the rest of
the year and maybe even come out with an OMO calendar, to lower the yields. ET
reported on April 5, 2021: “But investors would need clarity in communication from
Governor Shaktikanta Das on his agenda for the bond markets, which have lately
been roiled by hardening yields.”15
In other words, it seems that compared to the UMP announcements towards the
first half of our sample, such as TLTRO 2.0 or OT of April 23, 2020, the market was
much less surprised by the G-SAP announcements of 2021.
Finally, from April 2022 onwards, the RBI began tightening monetary policy in
a series of conventional announcements which entailed an increase in the policy
repo rate. While the market had begun expecting from December 2021 onwards that
the RBI would start the policy normalization in 2022, yet when the announcements
were made the market seems to have been surprised to a considerable extent. We
discuss this more in the next section.

14
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delib​erati​ons-​to-​annou​nce-​policy-​review-​on-​friday/​artic​leshow/​78532​290.​cms.
15
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this-​week/​artic​leshow/​81904​477.​cms.

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S270 A. Lakdawala et al.

3 Analyzing the bond market response to monetary policy

announcements

Appendix Figure 6 plots the yield on the 10-year GSec from March 2020 to June 2022.
This interest rate started at 6.3% in March 2020 and drifted down toward 5.8% by June
2020. Then it hovered around 6% for rest of the year before beginning its gradual rise
over the next year and a half to finish around 7.3%. What were the effects of the RBI’s
actions on this trend in long-term term interest rates? We aim to shed light on this
question in this section.
We will focus our attention on the announcement dates where RBI released a state-
ment on their regularly scheduled meeting dates and also include days when the RBI
made any unscheduled announcements about conventional or unconventional monetary
policy actions. Our sample runs from March 2020 to June 2022. There were 10 con-
ventional RBI announcement days, 29 unconventional announcement days and five days
when there were both conventional and unconventional announcements.
We categorize the announcements into “only CMP” which are days when only
conventional monetary policy announcements pertaining to the policy repo rate were
made. For instance, the MPC announcement of August 06, 2020 to keep the policy
repo rate unchanged at 4.00 per cent is classified as an only CMP date. Further, days
on which only announcements related to unconventional monetary policy measures,
such as the TLTRO, GSAP and OT, were made are classified as “only UMP” dates.
The announcement of simultaneous sale-purchase OMOs under Operation Twist
programme on April 23, 2020 or GSAP 2.0 on July 05, 2021 can be considered only
UMP dates. Lastly, days on which unconventional measures were announced along-
side conventional policy announcements by the MPC correspond to “CMP + UMP”
days. The historic policy package announced on March 27, 2020—reduction in pol-
icy repo rate, reverse repo rate, CRR and announcement of TLTROs—is an example
of such dual announcement dates.16
While news about RBI actions can potentially be released outside of these
dates, it is difficult to disentangle this information from general information
about Indian macroeconomy. This motivates our approach of focusing on RBI
announcement dates to more clearly identify the causal effect of monetary policy
on the bond market.
We start by studying whether RBI announcements moved bond yields more
than news coming out on a generic day. Table 2 shows the mean and standard
deviation of the daily change in 3-month, 1 year and 10-year government bond
yields on the three different categories of RBI announcement days compared with
all other days. The daily change is calculated as the change in yields from end of
16
During the pandemic, monetary policy communication by the MPC were accompanied with the
announcement of policy measures related to other functions of the RBI, such as regulation, supervision,
payments systems etc., by the RBI Governor. These announcements were made under a separate “State-
ment on Developmental and Regulatory Policies”. To that extent, several unconventional monetary pol-
icy measures were also announced under such statements and press releases issued by the RBI. We take
this into account by separate classification of announcement days as described in the paper. Lastly, since
the additional policy measures announced as a part of the separate statement focus on other areas of cen-
tral banking functions, such as payments systems, banking regulation and supervision, it is assumed not
to have any significant impact on bond markets.

13
Monetary policy announcements and bond yields in the pandemic S271

Table 2  Response of Government Bond Yields to Central Bank Announcements during the Pandemic:
Summary Statistics
Security Only CMP Only UMP UMP + CMP All Other Dates
Daily change (%) Mean Std. Dev Mean Std. Dev Mean Std. Dev Mean Std. Dev

3 M T-bill – 0.041 0.23 – 0.018 0.05 – 0.172 0.34 0.004 0.04

1Y GSec 0.001 0.17 0.007 0.11 – 0.078 0.25 0.002 0.08
10Y GSec 0.029 0.12 – 0.005 0.06 – 0.028 0.05 0.001 0.04

The above table reports the mean and standard deviation of daily change in government bond yields
(3-month, 1-year and 10-year) on days of only conventional monetary policy (CMP) announcements,
only unconventional monetary policy (UMP) announcements, a mix of CMP and UMP announcements
and all other non-policy days. The sample consists of 10 exclusive CMP announcement days, 29
exclusive UMP announcements, 5 CMP and UMP days and 556 other days during the 27/03/2020 to
31/06/2022 period. Source: Authors’ calculations

day (t) minus yields from end of day (t – 1). We have checked that the results are
very similar when using a two-day window.
The table shows that bond markets are clearly responding more to RBI
announcements compared to all other days. For both conventional and
unconventional policy announcements, the standard deviation of short-term and
long-term yields are higher as compared to all other days. The standard deviation
at the shorter end is substantially higher on announcement days, especially when
a conventional announcement is involved. It is interesting to note that bond yields
move more on announcement days with only conventional announcements relative
to days with only unconventional announcements. As we will discuss later,
this is consistent with the idea that there were many days with unconventional
announcements that were not surprising to the market and most of the “action” in
financial markets happened in the early period of the pandemic.
Table 8 in the Appendix shows similar summary statistics for the pre-pan-
demic sample with only conventional announcements. Those results show that the
pandemic response of bond yields has been similar to the pre-pandemic sample,
suggesting that transmission to financial markets is still an important first step
in the overall monetary transmission mechanism. Overall, this evidence provides
support for our event-study framework that there is some novel information being
released on RBI announcement dates.
To better understand how bond yields were affected by each RBI announce-
ment, we next plot the cumulative change in 10-year Gsec on RBI announcement
days separating again by only conventional, only unconventional and conven-
tional plus unconventional actions.
Figure 1 shows this cumulative change with the top left panel clubbing all RBI
announcements together. In the first few weeks of the pandemic, RBI actions sur-
prised markets in both directions, i.e., 10-year GSec went up in late March and
then down in early April. After this, the 10-year GSec fell on RBI announcement
days from April all the way until mid-2021. The total effect of RBI announce-
ments in the first year and a half of the pandemic was to reduce the 10-year GSec
rate by around 40 bps. In other words, long-term interest rates would have been

13
S272 A. Lakdawala et al.

(a) All Announcements (b) Only CMP

1
0.40 1

0.30 1 1

1
0.30 1

0.10
0.20
1 1

1 1

-0.10 1
0.10 1

-0.30
0 0

0
0.00 0

-0.50 -0.10
0 0

0 0

-0.70 0
-0.20 0
03-01-2020

03-04-2020

03-07-2020

03-10-2020

03-01-2021

03-04-2021

03-07-2021

03-10-2021

03-01-2022

03-04-2022

03-07-2022

01-03-2020
01-05-2020
01-07-2020
01-09-2020
01-11-2020
01-01-2021
01-03-2021
01-05-2021
01-07-2021
01-09-2021
01-11-2021
01-01-2022
01-03-2022
01-05-2022
01-07-2022
(c) Only UMP (d) CMP + UMP Announcements
1 1

0.30 1
0.30 1

1 1

0.10 1
0.10 1

1 1

-0.10 1
-0.10 1

-0.30 -0.30
0 0

0 0

-0.50 -0.50
0 0

0 0

-0.70 0
-0.70 0
03-01-2020
03-03-2020
03-05-2020
03-07-2020
03-09-2020
03-11-2020
03-01-2021
03-03-2021
03-05-2021
03-07-2021
03-09-2021
03-11-2021
03-01-2022
03-03-2022
03-05-2022
03-07-2022

03-01-2020
03-03-2020
03-05-2020
03-07-2020
03-09-2020
03-11-2020
03-01-2021
03-03-2021
03-05-2021
03-07-2021
03-09-2021
03-11-2021
03-01-2022
03-03-2022
03-05-2022
03-07-2022
Fig. 1  Cumulative Effect of RBI Announcements on Long-term Interest Rates during the Pandemic. The
above plots show the cumulative daily change in the yield on 10-year GSec on a all policy announcement
days; b only CMP days; c only UMP days; and d CMP + UMP days during the pandemic sample. The
daily change refers to the difference between yields on ‘t’ and ‘t – 1’ day around the policy announce-
ment. The graphs are from January 2020 to July 2022. Source: Authors’ calculations

40 bps higher if not for the surprise monetary policy actions announced by the
RBI. From mid-2021 to early 2022, there is no discernible trend in the move-
ment of 10-year GSec on RBI announcement days: interest rates went up on
some announcements and went down on others. Starting in April 2022, the RBI
started raising interest rates to combat inflation and we can see the corresponding
increase in the 10-year GSec.
The remaining three panels show this cumulative change broken down into
the three categories of announcements. Up until then, RBI announcements with
only unconventional actions contributed roughly 12 basis points in the 40 basis
points mentioned above. CMP only dates contributed roughly 8 basis points and
CMP + UMP dates contributed the remaining 20 basis points. Next, we will shed
more light on which specific dates and RBI announcements had the biggest impact
on the bond market. But we wrap up this discussion by noting that the rise in 10-year
yields was driven completely by conventional announcements as the last unconven-
tional policy action in the pandemic occurred on September 2021.

13
Monetary policy announcements and bond yields in the pandemic S273

3.1 Impact of the UMP announcements

We explored the yield data, meeting by meeting, and found that there are about 5
announcement days that are responsible for almost the full cumulative 40 basis point
change in the 10-year GSec in the first year and a half of the pandemic. Four of these
five dates correspond to the announcement of major unconventional actions, two
of them correspond to cuts in the repo rate, with one date which saw both uncon-
ventional and conventional actions. The unconventional actions include TLTRO
1.0 announcements on March 27 and March 30, 2020, TLTRO 2.0 on April 17
and Operation Twist announcement on April 23. We report these dates in Table 3
together with the two GSAP dates since combined this includes all the major
unconventional announcements. See Table 1 for more details of the policy actions
announced on these dates.
Table 3 shows the change in the 3-month Treasury Bill (TBill) and the 1-year
GSec in addition to the 10-year bond yields. The main purpose of the LTRO was
to inject liquidity into the financial system and preserve the orderly flow of credit
to households and firms. While this policy was not directly targeting GSec yields,
Table 3 shows that it had substantial effects on these yields, especially the first
TLTRO 1.0 and first TLTRO 2.0 announcements. The repo operations were of ten-
ors 1 and 3 years. Thus, we would expect the biggest effect around that maturity. But
we instead see that there are bigger effects on 3-month (and 6-month which is not
shown for brevity) than the 1-year GSec. What could explain this effect?
One potential mechanism through which this could have happened is the so-called
signaling channel of monetary transmission (see e.g., Bauer & Rudebusch, 2014;
Krishnamurthy & Vissing-Jorgensen, 2012). The idea is that an unconventional
monetary policy action is taken by the market as a signal of a more expansionary
path for the future path of the policy interest rate. To further investigate whether this
channel is more broadly prevalent for all the TLTRO announcements (there were 6
in total), we use data from Overnight Indexed Swaps. OIS interest rates have been

Table 3  Change in sovereign Event Date Daily Change (%)

bond yields for major policy
announcements during the 3M 1Y 10Y
pandemic
CMP + TLTRO 1.0 March 27, 2020 – 0.780 – 0.521 – 0.081
TLTRO 1.0 March 30, 2020 0.040 0.063 0.065
TLTRO 2.0 April 17, 2020 – 0.160 – 0.189 – 0.093
Operation Twist April 23, 2020 0.010 0.218 – 0.164
CMP May 22, 2020 – 0.570 – 0.282 – 0.073
GSAP 1.0 April 07, 2021 – 0.030 0.088 – 0.040
GSAP 2.0 June 04, 2021 – 0.010 0.006 0.031

The above table shows the daily change in government bond

yields of 3-month, 1-year and 10-year maturities on the day of the
respective announcement (t) compared with one day prior to the
announcement (t – 1) for sample period from March 2020 to June
2022. Source: Authors’ calculations

13
S274 A. Lakdawala et al.

Repo Rate Change Cum. Change in OIS 1M - All Announcements

Rev. Repo Rate Change Cum. Change in OIS 1M - Only UMP

0.20 0.2

-0.20 -0.2

-0.60 -0.6

-1.00 -1

-1.40 -1.4

-1.80 -1.8
01-03-2020

01-06-2020

01-09-2020

01-12-2020

01-03-2021

01-06-2021

01-09-2021

01-12-2021

01-03-2022

01-06-2022

01-03-2020

01-06-2020

01-09-2020

01-12-2020

01-03-2021

01-06-2021

01-09-2021

01-12-2021

01-03-2022

01-06-2022
Fig. 2  Cumulative Effect of Policy Announcements on Policy and OIS Rates during the Pandemic. The
above plot shows the cumulative daily change in the (a) policy repo rate and reverse repo rate; and (b)
1-month OIS rate during the pandemic sample. The daily change refers to the difference between yields
on ‘t’ and ‘t – 1’ day around the policy announcement. The graphs are for the period from January 2020
to June 2022. Source: Authors’ calculations

shown to be a good proxy for capturing the market’s expectations about future RBI
actions (see Lloyd, 2018; Rituraj, & Kumar., 2021; Talwar et al., 2021; Lakdawala
& Sengupta, 2021).
The top right panel of Appendix Figure 7 shows the average effect of the TLTRO
dates on OIS rates of maturity 1 month to 1 year. We show both the 1-day and the
2-day changes. The figure shows that OIS rates of all maturities fell on average on
TLTRO dates. This is suggestive evidence of the signaling channel of monetary
policy affecting government bond yields through expectations of future interest rate
changes. Moreover, we find that the average fall in 1-month OIS rates is roughly
20 basis points while that for 1-year OIS is roughly 10 basis points. This provides
further evidence for the signaling channel because absent the signaling channel we
would expect the bigger effect to happen around the maturity of the loans that were
targeted (i.e., 1 to 3 years). Finally (in results not reported here), we find that the
1-month OIS rate fell more on TLTRO 2.0 announcement relative to the TLTRO
1.0 announcements even though TLTRO 2.0 had a much lower offered amount
and subsequent fulfillment. Patra & Bhattacharya (2022) report that TLTRO
1.0 announcement of Rs. 1 lakh crores were fully availed but that TLTRO 2.0
announcement of Rs. 50,000 crores were only availed to the tune of Rs. 12,850
crores.
Appendix Figure 7 also investigates whether the signaling channel is present for
the other unconventional policy actions. The three other panels show the effect of
Operation Twist, GSAP 1.0 and GSAP 2.0. The figure shows that unlike TLTRO,
neither OT nor GSAP had any discernible signaling channel effect. Overall, our
results point to the signaling channel being an important component of the transmis-
sion mechanism of TLTRO but not the other unconventional actions.
Operation Twist (OT) involves the simultaneous open market purchase of gov-
ernment securities at the long-end of the yield curve and open market sales at the
short-end. The goal is to lower long-term interest rates while remaining net neutral
in terms of liquidity injection into the financial system. Table 3 shows that the first

13
Monetary policy announcements and bond yields in the pandemic S275

Target Factor
(All RBI Dates)
0.4

0.3

0.2

0.1
0.0

-0.1

-0.2

-0.3

-0.4

-0.5
3/27/20

4/17/20
5/22/20

8/31/20
9/14/20
10/9/20
11/12/20
12/4/20
12/24/20

2/15/21

3/18/21
4/29/21

7/15/21
9/20/21
10/8/21
2/10/22
4/3/20

8/6/20

1/7/21

3/4/21

6/4/21

5/4/22
Path Factor
(All RBI Dates)
1.6

1.2

0.8

0.4

0.0

-0.4

-0.8
3/27/20

4/17/20
5/22/20

8/31/20
9/14/20
10/9/20

12/4/20

2/15/21

3/18/21
4/29/21

7/15/21
9/20/21
10/8/21
2/10/22
4/3/20

8/6/20

11/12/20

12/24/20
1/7/21

3/4/21

6/4/21

5/4/22

Fig. 3  Monetary Policy Surprises during the Pandemic. The above plots show the movement of the target
and path factor, constructed using the approach of Lakdawala and Sengupta (2022), on the day of central
bank policy announcements. Our sample period is from March 2020 to June 2022. Source: Authors’ cal-
culations

OT announcement on April 23, 2020 was successful in this regard. 10-year GSec
yields fell by 16 basis points while there was an increase in 3-month T-bill of about
1 basis point. We might have expected the short end to go up more than just a basis
point but here we want to point out that there is a possibility that the direct effect

13
S276 A. Lakdawala et al.

of open market sales at the short end (which would put upward pressure) are being
neutralized by the signaling effect of the announcement (which would put downward
pressure).
To explore whether all the subsequent OT announcements had similar effects,
we plot the average change in GSec yields across all OT announcements in the
pandemic sample (there were 22 of these) in Appendix Figure 8. The figure shows
that on average OT announcements did not have the desired effect as there is
essentially zero change in the long or the short end of the yield curve on average.
Finally, we note that GSAP 1.0 and 2.0 had negligible effects on the yield curve
as seen in Table 3. Overall, these results suggest that unconventional monetary
policy actions undertaken by the RBI had substantial effects in lowering government
bond yields. But these effects were mostly clustered toward the beginning of the
pandemic.

3.2 Impact of conventional MP announcements

In our analysis so far, we have relied on studying the impact on the bond market
exclusively on RBI announcement days. As we argued above, in principle,
expanding this analysis to a broader sample is desirable so that we can capture the
full effect of RBI actions. However, the downside is that it is difficult to disentangle
effects of RBI actions from other factors affecting the economy. We next turn to
an analysis that tries to get an idea of how much “action” is going on in between
the RBI announcements. In doing this analysis we will also focus on conventional
policy actions of changes in short-term interest rates and forward guidance and the
role these have played in the RBI’s toolkit since the pandemic.
In the first year and a half of the pandemic, the RBI reduced the repo rate cumula-
tively by 115 basis points (first by 75 basis points on March 27, 2020 and then by 40
basis points on May 22, 2020). The reverse repo rate was cumulatively reduced by
155 basis points (90 bps on March 27, 2020 followed by 25 bps on April 17, 2020
and another 40 bps on May 22, 2020). All these rate decreases actually happened by
May 22, 2020. This is shown in the left panel of Fig. 2. The right panel of the figure
shows the cumulative change in the 1-month OIS rate for all RBI announcements
in the pandemic in the red line. The figure shows that by the end of May 2020, the
1-month OIS rate had decreased cumulatively by around 82 bps. This means that
82 bps out of the total 115 bps was a surprise to the market (at least in terms of its
timing). In other words, around 40 basis point reduction was cumulatively priced
in by markets going into RBI meetings. This is evidence that RBI had effectively
communicated their future policy stance, in one form or another, to the market. As
argued in recent work by Ahmed et al., (2022) and Lakdawala & Sengupta, (2021),
the RBI’s forward guidance has been an effective tool in the transmission of mon-
etary policy actions to financial markets. Moreover, Garga et al., (2022) show that
since the adoption of flexible inflation targeting, the RBI has been able to credibly
commit to the market that it is serious about inflation. Specifically, they show that
markets expected RBI to respond more aggressively to respond to inflation since the
adoption of inflation targeting.

13
Monetary policy announcements and bond yields in the pandemic S277

4 Forward guidance by RBI

The RBI officially described its stance on forward guidance in a document titled
“Communication policy of RBI” as follows17:
“The RBI’s approach to communicating the policy stance is to explain the
stance with rationale, information and analysis but to refrain from explicit for-
ward guidance with a preference for market participants and analysts to draw
their own inferences.”
In July 2021, during the pandemic, the RBI updated their communication policy
(calling it “Version 2.0”) where they removed the line about “refrain from explicit
forward guidance” and replaced it with “The Reserve Bank explains the monetary
policy measures and stance with the rationale, information and analysis to enable
market participants and other stakeholders to provide clarity about its assessment of
the evolving situation.”18
To further understand the role of forward guidance and RBI communication in
the pandemic, we follow the approach of Lakdawala and Sengupta (2021) and use
OIS rates to construct the target and path factors in the spirit of Gurkaynak et al.,
(2005). The target factor captures surprise changes to the short-term policy rate.
This is very similar to the raw changes in the 1-month OIS rates. The path factor is
supposed to capture surprise movements in medium-term rates (up to 1-year ahead)
over and above the effect coming from short-term rate surprises. This is very highly
correlated with the residual from regressing the 1-year OIS rate on the 1-month OIS
rate. Figure 3 plots the target and path factor realizations for our pandemic sample
from March 2020 to June 2022.
We conduct a narrative analysis similar to the one described in Sect. 2, for the
top target and path factor dates, wherein we study media reports from the Economic
Times to understand whether the biggest changes in the factors during our sample
indeed reflected market surprise, either in response to RBI’s policy rate surprises or
in response to a change in RBI’s communication or forward guidance. We also read
through RBI’s official statements to do a validation check. Our analysis reveals that
typically there is a clear and intuitive link between the target/path factor shocks and
RBI decisions, communication and related media coverage.
We look at the notable path factor dates to help us understand how the market
reacted to the communication from the RBI. For example, the biggest path factor
realization in our sample period was on May 4, 2022, when the RBI hiked the policy
repo rate by 40 bps in an unscheduled announcement for the first time since it had
reduced the rate to 4.0 percent in May 2020. The RBI mentioned in the monetary
statement: “Core inflation is likely to remain elevated in the coming months…All
these factors impart significant upside risks to the inflation trajectory… the risks to
the near-term inflation outlook are rapidly materialising… the MPC expects infla-
tion to rule at elevated levels, warranting resolute and calibrated steps to anchor
17
This archived document can be accessed at https://​web.​archi​ve.​org/​web/​20181​02906​4140/​https://​rbi.​
org.​in/​Scrip​ts/​Commu​nicat​ionPo​licy.​aspx.
18
This new policy can be found at https://​bit.​ly/​2V6sC​Im.

13
S278 A. Lakdawala et al.

inflation expectations and contain second round effects.” The substantially positive
path factor (1.252) captures this contractionary shock. The unscheduled announce-
ment clearly took the market by surprise as reported by ET: “the RBI’s decision
to act before its scheduled policy meet in June came as a bolt from the blue to
markets.”19
Another notable date was October 9, 2020 when over and above announcing
on-tap TLTRO (as discussed in the previous section) the RBI gave explicit forward
guidance in its monetary policy statement. Instead of the usual reiteration of
monetary policy stance (for example, “The MPC also decided to continue with the
accommodative stance as long as it is necessary to revive growth” as in the August
2020 statement), the October statement mentioned the following:
“The MPC also decided to continue with the accommodative stance as long
as necessary – at least during the current financial year and into the next
financial year – to revive growth on a durable basis…”
There was no rate action and hence the target factor was almost zero whereas
the path factor for this date was – 0.174 reflecting the expansionary shock.
Figure 4 shows the cumulated surprises of the path factor for the full pandemic
sample. The blue line shows the cumulative changes on all announcement days
while the orange line depicts only unconventional announcement days. There are a
few interesting things to point out from this graph. First, we showed in Fig. 2 above
that expansionary surprise changes to the short-rate were clustered in the beginning
of the pandemic and that by mid-2021 the cumulated 1-month OIS rate had bot-
tomed out, staying there until the hiking cycle in 2022. For the path factor, the story
is quite different. While path factor surprises do trend downward in the first few
months of the pandemic, they continue to fall over the entirety of the pandemic. This
suggests that forward guidance shocks continued to have an expansionary effect on
market interest rates in the latter part of 2021 and early 2022. Second, when com-
paring the blue and the yellow line, we notice that they are surprisingly close to each
other. The orange line only considers the unconventional monetary policy announce-
ments. The fact that the orange line is so close to the blue line suggests that most of
the effect of forward guidance happened on days with unconventional monetary pol-
icy announcements. This is further evidence that the signaling channel of monetary
policy is at play. Since unconventional monetary policy actions ceased in September
2021, we see that the contractionary forward guidance shocks in mid-2022 were all
on RBI announcements about conventional actions.
Since forward guidance appears to be an important component of the RBI toolkit
in the pandemic, next we formally evaluate the direct effect of forward guidance
shocks on the bond market. We conduct this analysis using an event-study frame-
work of regressing changes in government bond yields on the target and path fac-
tors calculated from OIS rate changes on RBI announcement days. Details on data
and sources have been provided in the Appendix. Summary statistics for the target
and path factors for the pandemic sample together with a pre-pandemic sample that

19
https://​econo​micti​mes.​india​times.​com/​marke​ts/​stocks/​news/​key-​takea​ways-​from-​surpr ​ise-​rbi-​rate-​
hike-​what-​inves​tors-​should-​look-​for/​artic​leshow/​91319​104.​cms.

13
Monetary policy announcements and bond yields in the pandemic S279

Cum. Sum of Path Factor - All Cum. Sum of Path Factor - only UMP

0.50

0.00

-0.50

-1.00

-1.50

-2.00

-2.50

-3.00

-3.50
02-03-2020

02-04-2020
02-05-2020

02-06-2020
02-07-2020

02-08-2020

02-09-2020
02-10-2020

02-11-2020
02-12-2020

02-01-2021

02-02-2021
02-03-2021

02-04-2021
02-05-2021

02-06-2021
02-07-2021

02-08-2021

02-09-2021
02-10-2021

02-11-2021
02-12-2021

02-01-2022

02-02-2022
02-03-2022

02-04-2022
02-05-2022

02-06-2022
Fig. 4  Cumulative Effect of Policy Announcements on the Path Factor Surprises during the Pan-
demic. The above plot shows the cumulative sum of the path factor during the pandemic sample on all
announcement days and only UMP announcement days, in solid blue and solid orange line, respectively.
Our sample period is from March 2020 to June 2022. Source: Authors’ calculations

runs from January 2016 to February 2020 are shown in Appendix Table 9. The table
shows that the properties of the target and path factor in the pandemic sample are
qualitatively similar to the pre-pandemic sample.

Table 4  Response of sovereign bond yields to RBI announcements: pre-pandemic sample

Indep. 3 M TBill Rate 1Y GSec Yield 10Y GSec Yield
Var
(1) (2) (3) (4) (5) (6) (7) (8) (9)

C – 0.01 0.01 – 0.01 – 0.02 0.02 0.01 0.00 0.03 0.02

(0.01) (0.01) (0.01) (0.02) (0.01) (0.01) (0.02) (0.02) (0.02)
Target 0.60 0.57 0.49 0.30 0.59 0.48
Factor
(0.05)*** (0.04)*** (0.22)** (0.07)*** (0.10)*** (0.17)**
Path Fac- 0.17 0.06 0.33 0.27 0.26 0.16
tor
(0.10)* (0.03) (0.06)*** (0.03)*** (0.12)*** (0.10)**
Observa- 25 25 25 25 25 25 25 25 25
tions
Adj. R-sq.0.62 0.13 0.62 0.33 0.54 0.65 0.40 0.25 0.48
F-stat. 40.63 4.65 20.85 12.64 29.15 23.24 17.22 9.12 12.29

The above table reports the regression estimates of daily change in sovereign bond yields (3-month
TBill, 1-year and 10-year GSec yields) on target and path factors constructed using Lakdawala and Sen-
gupta (2021) approach. The sample period consists of daily data beginning in January 2016 and ending
in February 2020. Estimation has been carried out over RBI announcements days only. Adjusted standard
errors are reported in the parentheses
*, **, *** correspond to 10%, 5% and 1% level of significance. Source: Authors’ calculations

13
S280 A. Lakdawala et al.

Table 5  Response of sovereign bond yields to RBI announcements: pandemic sample

Indep.Var 3 M TBill Rate 1Y GSec Yield 10Y GSec Yield
(1) (2) (3) (4) (5) (6) (7) (8) (9)

C – 0.03 – 0.01 0.01 0.00 0.02 0.04 – 0.01 0.01 0.01

(0.01)* (0.01) (0.02) (0.02) (0.02) (0.02) (0.01) (0.01)* (0.01)*
Target Factor 0.57 0.77 0.45 0.63 – 0.09 0.02
(0.81) (0.74)* (0.62) (0.52)** (0.12) (0.05)
Path Factor 0.42 0.52 0.39 0.48 0.29 0.29
(0.27) (0.32) (0.25)* (0.25)* (0.07)*** (0.07)***
Observations 34 34 34 34 34 34 34 34 34
Adj. R-sq. 0.07 0.11 0.26 0.03 0.09 0.19 0.01 0.37 0.35
F-stat. 3.50 5.16 6.89 2.11 4.40 4.76 0.47 20.57 9.99

The above table reports the regression estimates of daily change in sovereign bond yields (3-month
TBill, 1-year and 10-year GSec yields) on target and path factors constructed using Lakdawala and
Sengupta (2021) approach. The sample period consists of daily data beginning from March 27, 2020
and ending in June 2022. Estimation has been carried out over unconventional monetary policy
announcements days only. Adjusted standard errors are reported in the parentheses
*, **, *** correspond to 10%, 5% and 1% level of significance. Source: Authors’ calculations

In Tables 4 and 5, we present the results of regressing GSec yields (3-month,

1-year and 10-year) on the target and path factors. Table 4 shows the results for
a pre-pandemic sample from January 2016 to February 2022. Focusing on the
response of the 10-year GSec yields, we notice that only the target factor is statisti-
cally significant. Moreover, the size of the target factor coefficient and the associ-
ated ­R2 are much bigger relative to the path factor. This suggests that bond markets
were responding mainly to surprise changes in the RBI’s short-term interest rate
changes rather than any forward guidance. In the pandemic sample, the story is
quite different. Now only the path factor is significant, and it explains substantially
more of the variation in the 10-year GSec yields.
We conduct several robustness checks. First, for the pandemic sample, we include
a daily measure of global risk aversion and uncertainty proposed by Bekaert et al.
(2022) to control for global factors that maybe influencing domestic bond yields dur-
ing the pandemic period. We report the results in Appendix Table 11. The path fac-
tor continues to be statistically significant implying our main result is robust to this
specification. We also estimate the model using US VIX index as a proxy for uncer-
tainty/risk aversion and our results hold. We do not report the results here for brevity.
Next, we drop all such observations where announcements by the RBI were immedi-
ately preceded by policy announcements from the Federal Open Market Committee
(FOMC) of the US Fed and/or the European Central Bank (ECB).20 In such cases,
announcements by the FOMC or the ECB could drive the changes in domestic bond

20
We find that there were three days when RBI announcements were preceded by FOMC/ECB
announcements—(a) RBI’s December 11, 2020 announcement was preceded by ECB announcement of
December 10, 2020; (b) Policy announcement by RBI on March 18, 2021 and April 29, 2021 were pre-
ceded by announcement of FOMC’s decision on March 17, 2021 and April 28, 2021. We also find two
overlapping policy days between RBI and FOMC, namely November 05, 2020 and May 04, 2022. How-
ever, these dates should not matter for Indian bond market given the time zone difference.

13
Monetary policy announcements and bond yields in the pandemic S281

yields. Shown in Appendix Table 12, we find that our results are also robust to drop-
ping such observations. Thus, we conclude that the RBI’s forward guidance has been
effective in driving long-term interest rates in the pandemic sample.

5 Conclusion

In recent years, unconventional monetary policies have been used regularly by

central banks in advanced countries. However, some of the pandemic era mon-
etary policies implemented by the RBI were new and untested in the Indian con-
text. In this paper, we investigated the bond market response to these policies.
Combining a narrative analysis with an event-study framework, we find that the
RBI’s actions were responsible in keeping long-term interest rates low, espe-
cially at the beginning of the pandemic. We find that some of the unconventional
monetary policy actions had a substantial signaling channel component where
the market perceived the announcement of an unconventional monetary policy
action as representing a lower future path for the short-term policy rate. We also
find that the RBI’s forward guidance was more effective in the pandemic than it
had been in the couple of years preceding the pandemic.
In addition to documenting the effects of these policies, our results have
implications for the design of future monetary policy. One important finding is
that unconventional measures implemented at the beginning of the pandemic
were more effective than those that happened a year into the pandemic. Moreo-
ver, the initial announcements of the unconventional actions were more effective
than subsequent expansions of the programs. Thus, a potential policy implica-
tion for the RBI is to strike quickly in response to the next crisis but also to wind
down quickly.

Appendix

See Figs. 5, 6, 7 and 8, Tables 6, 7, 8, 9, 10, 11 and 12.

13
S282 A. Lakdawala et al.

Headline Inflation 1-year ahead IE Target Lower bound Upper bound

9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2014Q1
2014Q2
2014Q3
2014Q4
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
2017Q2
2017Q3
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
2019Q1
2019Q2
2019Q3
2019Q4
2020Q1
2020Q2
2020Q3
2020Q4
2021Q1
2021Q2
2021Q3
2021Q4
2022Q1
2022Q2
2022Q3
2022Q4
Fig. 5  Actual and Expected Inflation in India. The above chart shows the quarterly headline inflation and
one year ahead expected inflation rate for India for Q1:2014 to Q4:2022. Headline inflation, shown by
solid blue line, is measured in terms of year-on-year percentage change in consumer price index (CPI-
combined). Inflation expectations, shown by solid green line, were taken from the Survey of Professional
Forecasters (SPF) conducted by the RBI. The official target rate of inflation at 4 per cent, along with
the ± 2 per cent band, is shown using dotted black and red lines, respectively. Source: Reserve Bank of
India

8.0
7.8
7.5
7.3
7.0
6.8
6.5
6.3
6.0
5.8
5.5
01-03-2020

01-05-2020

01-07-2020

01-09-2020

01-11-2020

01-01-2021

01-03-2021

01-05-2021

01-07-2021

01-09-2021

01-11-2021

01-01-2022

01-03-2022

01-05-2022

01-07-2022

Fig. 6  Long-term Interest Rates (10-Year Benchmark Government Bond Yield) in India. The above fig-
ure shows the daily yield on 10-year Government Securities (GSec) for the period beginning March 2020
and ending in August 2022. Source: Bloomberg

13
Monetary policy announcements and bond yields in the pandemic S283

(a) Operation Twist (b) TLTROs

t-1 day t day t+1 day t-1 day t day t+1 day

3.80 4.60

3.75 4.50

3.70 4.40

3.65 4.30

3.60 4.20

3.55 4.10

3.50 4.00
OIS 1m OIS 3m OIS 6m OIS 9m OIS 1y OIS 1m OIS 3m OIS 6m OIS 9m OIS 1y

(c) GSAP 1.0 (d) GSAP 2.0

t-1 day t day t+1 day t-1 day t day t+1 day

4.00 4.00
3.90 3.90
3.80 3.80
3.70
3.70
3.60
3.60
3.50
3.50
3.40
3.40 3.30
3.30 3.20
3.20 3.10
1m OIS 3m OIS 6m OIS 9m OIS 1y OIS 1m OIS 3m OIS 6m OIS 9m OIS 1y OIS

Fig. 7  Impact of unconventional monetary policy announcements on OIS rates: the signaling channel of
monetary policy. The above figure shows the OIS yield curve one day prior (t – 1), same day (t) and one
day after (t + 1) the announcement of (a) Operation Twist (OT) or simultaneous sale-purchase opera-
tions; (b) Targeted Long-term Repo Operations (TLTROs); (c) G-Sec Acquisition Programme 1.0; and
(d) G-Sec Acquisition Programme 2.0. Our sample period is from March 2020 to June 2022. Source:
Authors’ calculations; Bloomberg

13
S284 A. Lakdawala et al.

(a) Operation Twist (b) TLTROs

t-1 day t day t+1 day t-1 day t day t+1 day

6.50
6.00
6.00
5.50
5.50
5.00
5.00
4.50
4.00 4.50

3.50 4.00
3.00 3.50
2.50 3.00
3m Tbill 6m Tbill 1y Gsec 5y Gsec 10y Gsec 3m Tbill 6m Tbill 1y Gsec 5y Gsec 10y Gsec

(c) GSAP 1.0 (d) GSAP 2.0

t-1 day t day t+1 day t-1 day t day t+1 day

6.50
6.00
6.00
5.50
5.50
5.00
5.00
4.50 4.50

4.00 4.00

3.50 3.50
3.00 3.00
3m Tbill 6m Tbill 1y Gsec 5y Gsec 10y Gsec 3m Tbill 6m Tbill 1y Gsec 5y Gsec 10y Gsec

Fig. 8  Impact of unconventional monetary policy announcements on sovereign bond yield curve. The
above figure shows the government securities yield curve one-day prior (t – 1), same day (t) and one day
after (t + 1) the announcement of (a) Operation Twist (OT) or simultaneous sale-purchase operations;
(b) Targeted Long-term Repo Operations (TLTROs); (c) G-Sec Acquisition Programme 1.0; and (d)
G-Sec Acquisition Programme 2.0. In case of multiple announcements, rates have been averaged across
all announcements. Our sample period is from March 2020 to June 2022. Source: Authors’ calculations;
Bloomberg

13
Monetary policy announcements and bond yields in the pandemic S285

Table 6  Unconventional monetary policy announcements by the RBI during pandemic

Type of actions Description

TLTRO (Targeted Auctions of targeted term repos of up to three years tenor of appropriate sizes
long-term repo for a total amount of up to Rs. 1,00,000 crores at a floating rate, linked to the
operation) policy repo rate. Liquidity availed under the scheme by banks to be deployed
in investment grade corporate bonds, commercial paper and non-convertible
debentures over and above the outstanding level of their investments in these
bonds as on March 25, 2020. Announced on March 27, 2020.
TLTRO 2.0 Targeted Long-Term Repo Operations at the policy repo rate for tenors up to
three years for a total amount of up to Rs. 50,000 crores, to begin with, in
tranches of appropriate sizes. The funds availed by banks under TLTRO 2.0 to
be invested in investment grade bonds, commercial paper, and non-convertible
debentures of NBFCs, with at least 50 per cent of the total amount availed
going to small and mid-sized NBFCs and MFIs. Announced on April 17, 2020.
On-tap TLTRO Targeted long-term repo operations with tenors of up to three years for a total
amount of up to Rs. 1,00,000 crores at a floating rate linked to the policy repo
rate. The scheme to be available up to March 31, 2021 with flexibility with
regard to enhancement of the amount and period after a review of the response
to the scheme. Liquidity availed by banks under the scheme to be deployed
in corporate bonds, commercial papers, and non-convertible debentures
issued by the entities in specific sectors over and above the outstanding level
of their investments in such instruments as on September 30, 2020. The
liquidity availed under the scheme could also be used to extend bank loans and
advances to these sectors.
OT (Operation Twist) Simultaneous purchase of long-term and sale of short-term government
securities under Open Market Operations to compress the term premium and
reduce the steepness of the yield curve. First announced in December 2019.
First announcement during pandemic on April 23, 2020.
GSAP A secondary market G-sec (government securities) acquisition programme or
G-SAP 1.0 wherein the RBI committed upfront to a specific amount of open
market purchases of GSecs.
On April 7, 2021 RBI announced a G-SAP of Rs. 1 lakh crore for Q1:2021–22.
GSAP 2.0 was announced on June 4, 2021 for Q2:2021–22 for secondary market
purchase operations of Rs. 1.20 lakh crore to support the market.

The above table provides a key summary of various types of unconventional monetary policy
announcements made by the RBI in recent years. Source: Reserve Bank of India

13
 Table 7  Monetary policy announcement dates by the RBI during the pandemic
S286

Date Type of action Scheduled or unscheduled Description

announcement

13
March 27, 2020 CMP + UMP Unscheduled Repo rate cut by 75 bps to 4.4%, reverse repo rate cut by 90 bps to 4%, CRR cut by
1% to 3%; TLTRO 1.0
March 30, 2020 UMP Unscheduled TLTRO
April 3, 2020 UMP Unscheduled TLTRO
April 15, 2020 UMP Unscheduled TLTRO
April 17, 2020 CMP + UMP Unscheduled Reverse repo rate lowered to 3.75%; TLTRO 2.0
April 23, 2020 UMP Unscheduled OT
May 22, 2020 CMP Scheduled Repo rate lowered to 4%, reverse repo rate to 3.35%, MSF rate to 4.25%
June 29, 2020 UMP Unscheduled OT
August 6, 2020 CMP Scheduled No rate changes
August 25, 2020 UMP Unscheduled OT
August 31, 2020 UMP Unscheduled OT
September 7, 2020 UMP Unscheduled OT
September 14, 2020 UMP Unscheduled OT
September 24, 2020 UMP Unscheduled OT
October 9, 2020 CMP Scheduled No rate changes
November 5, 2020 UMP Unscheduled OT
November 12, 2020 UMP Unscheduled OT
November 19, 2020 UMP Unscheduled OT
December 4, 2020 CMP Scheduled No rate changes
December 11, 2020 UMP Unscheduled OT
December 24, 2020 UMP Unscheduled OT
December 31, 2020 UMP Unscheduled OT
January 7, 2021 UMP Unscheduled OT
A. Lakdawala et al.
 Table 7  (continued)
Date Type of action Scheduled or unscheduled Description
announcement
February 5, 2021 CMP Scheduled No LAF rate changes; CRR raised to 4% (in 2 phases)
February 15, 2021 UMP Unscheduled OT
February 24, 2021 UMP Unscheduled OT
March 4, 2021 UMP Unscheduled OT
March 10, 2021 UMP Unscheduled OT
March 18, 2021 UMP Unscheduled OT
April 7, 2021 CMP + UMP Scheduled No rate changes; GSAP 1.0
April 29, 2021 UMP Unscheduled OT
May 5, 2021 UMP Unscheduled GSAP 1.0
June 4, 2021 CMP + UMP Scheduled No rate changes; GSAP 1.0
July 5, 2021 UMP Unscheduled GSAP 2.0
July 15, 2021 UMP Unscheduled GSAP 2.0
August 6, 2021 CMP Scheduled No rate changes; GSAP 2.0
Monetary policy announcements and bond yields in the pandemic

September 20, 2021 UMP Unscheduled GSAP 2.0; OT

September 23, 2021 UMP Unscheduled GSAP 2.0; OT
October 8, 2021 CMP Scheduled No rate changes
December 8, 2021 CMP Scheduled No rate changes
April 8, 2022 CMP Scheduled Rev repo rate replaced with SDF rate increased to 3.75%
May 4, 2022 CMP Unscheduled Repo rate raised to 4.4%, SDF rate to 4.15%, MSF rate to 4.65%; CRR raised to 4.5%
June 8, 2022 CMP Scheduled Repo rate raised to 4.9%, SDF rate to 4.65%, MSF rate to 5.15%

The above table provides a list of all policy announcements made by the RBI between March 2020 and June 2022. Details on the date of the policy announcement, a
categorization into conventional monetary policy (CMP) and unconventional monetary policy (UMP), whether scheduled/unscheduled and key features, including policy
rate changes, have been provided in the table. Source: Reserve Bank of India
S287

13
S288 A. Lakdawala et al.

Table 8  Response of Security CMP Dates All Other Dates

government bond yields to
central bank announcements Daily change (%) Mean Std. Dev Daily change (%) Mean
before the pandemic: summary
statistics 3 M T-bill Rate – 0.004 0.094 3 M T-bill Rate – 0.004
1Y GSec Rate – 0.011 0.102 1Y GSec Rate – 0.011
10Y GSec Rate 0.011 0.112 10Y GSec Rate 0.011

The above table reports the mean and standard deviation of daily
change in government bond yields (3-month, 1-year and 10-year) on
days of conventional monetary policy (CMP) announcement days
and all other days between 01/01/2020 to 26/03/2020 period. The
sample consists of 25 CMP announcement days. Source: Authors’
calculations

Table 9  Target and path factors in pre-pandemic and pandemic period: summary statistics
Target Factor Path Factor
Pre-Pandemic Pandemic Pre-Pandemic Pandemic

Mean 0.014 – 0.015 Mean 0.014

Median 0.002 – 0.011 Median 0.002
Max 0.351 0.308 Max 0.351
Min – 0.347 – 0.399 Min – 0.347
Std. Deviation 0.125 0.095 Std. Deviation 0.125
Skewness 0.030 – 0.753 Skewness 0.030
Kurtosis 6.176 10.539 Kurtosis 6.176
Observations 25 44 Observations 25

The above table shows the summary statistics for the target and path factors constructed using Lakdawala
and Sengupta (2022) approach. The pre-pandemic period refers to 01/01/2016 – 06/02/2020 while
pandemic sample corresponds to the period between 27/03/2020 and 08/06/2022. Source: Authors’
calculations

Table 10  Data and sources

S. No Data Source

1 3M Tbill Rate (%) Thomson Reuters

2 1Y Benchmark GSec Yield (%) Thomson Reuters
3 10Y Benchmark GSec Yield (%) Thomson Reuters
4 Overnight Indexed Swap Rates (%)—Various Bloomberg
Maturities
5 Target and Path Factor Monetary Policy Authors calculations following Lakdawala and
Surprises Sengupta (2022)
6 RBI Policy Announcement Dates Reserve Bank of India website (www.​rbi.​org.​in)

13
Monetary policy announcements and bond yields in the pandemic S289

Table 11  Response of sovereign bond yields to RBI announcements: pandemic sample with global risk
aversion and uncertainty index
Indep. Var 3 M TBill Rate 1Y GSec Yield 10Y GSec Yield

(1) (2) (3) (4) (5) (6) (7) (8) (9)

C 0.00 – 0.01 0.02 0.03 0.01 0.04 – 0.01 0.01 0.01

(0.01) (0.01) (0.02) (0.02)* (0.02) (0.02)*** (0.01) (0.01) (0.01)
Target 1.22 1.22 1.08 1.08 – 0.06 – 0.05
Factor
(0.41)*** (0.41)*** (0.16)*** (0.15)*** (0.12) (0.11)
Path 0.27 0.28 0.19 0.19 0.31 0.31
Factor
(0.12)** (0.16)* (0.12) (0.13) (0.07)*** (0.07)***
ΔGRAt−1 0.15 0.06 0.13 0.15 0.07 0.13 0.008 – 0.02 – 0.02
(0.07)** (0.05) (0.07)* (0.05)*** (0.04) (0.05)*** (0.03) (0.02) (0.02)
Observa- 31 31 31 31 31 31 31 31 31
tions
Adj. 0.46 0.14 0.49 0.42 0.14 0.42 0.01 0.35 0.33
R-sq.
F-stat. 13.68 3.43 10.63 11.68 3.42 8.26 0.35 8.95 5.86

The above table reports the regression estimates of daily change in sovereign bond yields (3-month
TBill, 1-year and 10-year GSec yields) on target and path factors constructed using Lakdawala and
Sengupta (2021) approach and lagged daily change in global risk aversion (GRA) proposed by Bekaert
et al. (2022). The sample period consists of daily data beginning from March 27, 2020 and ending in
June 2022. Estimation has been carried out over unconventional monetary policy announcements days
only. Adjusted standard errors are reported in the parentheses
*, **, *** correspond to 10%, 5% and 1% level of significance. Source: Authors’ calculations

Table 12  Response of sovereign bond yields to RBI announcements: pandemic sample without coincid-
ing announcement dates
Indep. Var 3 M TBill Rate 1Y GSec Yield 10Y GSec Yield
(1) (2) (3) (4) (5) (6) (7) (8) (9)

C – 0.03 – 0.01 0.02 0.01 0.02 0.05 – 0.01 0.01 0.01

(0.02)* (0.01) (0.02) (0.03) (0.02) (0.02)** (0.01) (0.01) (0.01)
Target Factor 0.56 0.78 0.46 0.66 – 0.10 0.01
(0.40) (0.39)* (0.34) (0.29)** (0.06) (0.04)
Path Factor 0.42 0.54 0.40 0.51 0.29 0.29
(0.26) (0.35) (0.22)* (0.27)* (0.05)*** (0.06)***
Observations 31 31 31 31 31 31 31 31 31
Adj. R-sq. 0.06 0.11 0.26 0.03 0.10 0.20 0.01 0.37 0.35
F-stat. 3.07 4.60 6.26 2.01 4.15 4.69 0.59 18.51 8.95

The above table reports the regression estimates of daily change in sovereign bond yields (3-month
TBill, 1-year and 10-year GSec yields) on target and path factors constructed using Lakdawala and
Sengupta (2021) approach. The sample period consists of daily data beginning from March 27, 2020
and ending in June 2022. Estimation has been carried out over unconventional monetary policy
announcements days only. Adjusted standard errors are reported in the parentheses
*, **, *** correspond to 10%, 5% and 1% level of significance. Source: Authors’ calculations

13
S290 A. Lakdawala et al.

Acknowledgements We would like to thank the guest editor Kundan Kishor and two anonymous review-
ers for their helpful comments and suggestions. The views expressed in this paper are those of the authors
and do not necessarily represent the views of the organizations that they represent

Funding No funding was received to assist with the preparation of this manuscript.

Data availability The financial market data, such as government bond yields and overnight indexed swaps
(OIS), used in this study were sourced from Bloomberg and Thomson Reuters. Restrictions apply to the
availability of this data which were used under license and so are not publicly available. Dataset on mon-
etary policy announcements made by the Reserve Bank of India (RBI) was constructed using publicly
available information on RBI’s official website (www.rbi.org.in). The dataset constructed for the purpose
of this study, including information on monetary policy announcements and target/path factors, are pub-
licly available on the authors’ website.

Declarations
Conflict of interest The corresponding author states that there is no conflict of interest. The authors have
no competing interest to declare that are relevant to the content of this article.

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