The Reserve Bank of India (RBI) has commenced something that is akin to the famous “Operation Twist” conducted by the US Federal Reserve 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 (OMOs).
On Thursday, the RBI said it would be buying the 6.45% yielding notes maturing in 2029 — the benchmark bonds — and would be selling four papers maturing in 2020.
The OMOs would be conducted on Monday.
The step is liquidity neutral — meaning the OMOs would not be adding any further liquidity to the system that is already flush with excess liquidity to the tune of over Rs. 2 lakh crore. The simultaneous purchase and sale of securities would also help in flattening the steep yield curve — where long tenor yields have been high and short-term yields have been low.
For instance, despite a 60 bps reduction in the repo rate across two monetary policies in August and October, the benchmark yield remains higher by 38 basis points since August. At the same time, the system liquidity has been so high that short-tenor yields have remained fairly low. In some instances, even the 364-day treasury bill yield has gone below the repo rate — a not so usual occurrence.
Manish Wadhawan, independent fixed income and forex expert, said that it is an acknowledgement from RBI, after their surprise policy where they did not cut rates, that term premia in the government securities market is hovering around all time high. “This is a signal to the market that the central bank might intervene to calm the rising yields. My view is that there could be more OMOs like these. However, the market will wait out for the final jury on the Budget day when we will come to know what kind of fiscal deficit does the government announce,” he said.
During the December monetary policy when the RBI governor was asked about the possibility of an Operation Twist, he did not make any specific comments on the matter. Experts believe that the central bank may do more of these OMO purchases/sales in coming times that will eventually bring down excess supply of long-tenor bonds in the market.
As MS Gopikrishnan, independent market expert, pointed out transmission has been a big issue in this rate cut cycle.
“The long tenor G-sec yields have not moved lower since last couple of rate cuts. This will bring down the term premium and will be one more step towards improving transmission of rates. I believe the RBI should be doing these OMO buys/sales worth at least Rs. 50,000 crore in this series. This will also help to absorb excess long tenor bond supply that could be hitting the market on account of potential fiscal slippage from budgeted levels,” he said.
Source: Financial Express
