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Bonds rally on open market operations euphoria

The RBI said it would be buying the 6.45% yielding notes maturing in 2029 — the benchmark bonds — and selling four papers maturing in 2020.

After the Reserve Bank of India (RBI) announced the simultaneous purchase and sale of long-and short-tenor bonds, the benchmark yield fell 15 basis points to close at over two-week low of 6.60%.

The central bank on Thursday had announced the Indian version of ‘Operation Twist’, conducted by the US Federal Reserve in 2011-2012 in an effort to cheapen long-term borrowing and spur bank lending, by deciding to buy the long-tenor 10-year benchmark bonds worth Rs 10,000 crore and selling four short-dated securities worth the same amount under open market operations (OMO).

The RBI said it would be buying the 6.45% yielding notes maturing in 2029 — the benchmark bonds — and selling four papers maturing in 2020. The OMO operations will be conducted on Monday.

The announcement has resulted in a rally in long-tenor bonds along with some bit of hardening in short-tenor yields. For example, the yield on 30-year government securities fell by 20.5 basis points to 7.12% on Friday, while yield on the two-year paper rose six basis points to 5.88%, according to Bloomberg data.

Ananth Narayan, professor (finance) at SPJIMR pointed out in a note that while the immediate size of this operation is small, there will very likely be more tranches to follow. “On the back of large borrowings by the central government, state government and public sector enterprises, the India government bond (IGB) yield curve is among the steepest in the world. When quizzed about incomplete transmission of policy rate cuts to bank lending rates, bankers have pointed to the high IGB term premium as coming in the way of monetary transmission. In addition, the government has been seeking lower IGB yields, even as it struggles with a deteriorating fiscal balance on the back of very low tax revenues. RBI’s operation twist will help address these concerns around transmission. It will also help the government navigate its fiscal challenges,” he wrote.

A dealer told FE that he expects more of such operations to be announced. “This time, it is the 10-year benchmark bonds that the RBI is buying. Going forward, it may be possible that the central bank may purchase some other long-tenor bonds. That needs to be watched.

However, for the time being, a downward pressure on the yields is likely to remain,” he said.

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Source: Financial Express