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RBI’s auction of govt bonds will be liquidity neutral: DBS

The RBI’s announcement regarding sale and purchase of government securities will be liquidity neutral unlike traditional open market operations, according to a report by DBS Bank released on Friday.

The central bank has decided to conduct simultaneous purchase and sale of government securities under Open Market Operations (OMO) for Rs 10,000 crore each on December 23, 2019.

According to a press release issued by the RBI on Thursday, the decision has been taken after a review of the current liquidity and market situation and an assessment of the evolving financial conditions.

The government will purchase 6.45 per cent government bonds maturing in 2029 and simultaneously selling the same amount of short-term bonds maturing in 2020 on December 23, 2019.

“Given the scope of likely additional borrowings in early 2020, we reckon more is likely to follow to limit rise in the longer-tenor yields,” the report said.

There was no indication whether it was a one-time exercise or part of continuing operations, it said.

Parallels are being drawn with Fed’s Operation Twist (Op-Twist, USD 400billion) that was announced in September 2011 and ran through end-2012, according to DBS.

“We reckon that this ‘Op-Twist’ move is part of broader measures by the central bank to expedite policy transmission, when seen in the broader context of prodding banks to peg part of the loan book to external benchmarks, keep an accommodative policy bias, provide support to non-bank institutions and keeping liquidity ample,” said DBS.

More steps are likely to smoothen the liquidity and credit premia aspects of the lending rates to hasten the pass-through of an easy monetary policy, it said.

Source: Economic Times