Mumbai: Long-duration and dynamic bond funds are likely to be the biggest beneficiaries of the Reserve Bank of India’s (RBI) surprise decision to emulate the Federal Reserve’s ‘Operation Twist’.
RBI on Thursday said it will conduct a simultaneous sale and purchase of bonds, in a move seen by market participants as an attempt to bring down long-term yields.
“The long-tenor funds category was witnessing a lot of heat because of fiscal deficit overshoot. That category has been a big winner of yesterday’s RBI announcement. Dynamic bond funds may be a better bet too,” said Lakshmi Iyer, Chief Investment Officer for Fixed Income at Kotak Mahindra Asset Management.
The central bank’s measures over the last six months to boost liquidity in the system gas resulted in a significant rally in short-term bonds.
Operation Twist: RBI adopts a Jerome Powell manoeuvre
20 Dec, 2019
The Reserve Bank of India will conduct a simultaneous sale and purchase of bonds, it said on Thursday, in a move seen by market participants as an attempt to bring longer-term yields lower. It is the first time RBI would be conducting a special OMO of this kind, similar to the ‘Operation Twist’ carried out in the US near the start of the decade.
“The liquidity was huge, and the rate of transmission happened on the shorter end. Fiscal worries also kept the long-term rates elevated,” said Devang Shah, deputy head- fixed income at Axis Mutual Fund.
“This should lead to flattening of the curve, whereby long bonds should rally for some time. Funds with allocation to longer-tenor bonds will benefit in the near term, which include dynamic bond funds,” he added.
According to Dwijendra Srivastava, CIO- fixed income, Sundaram Mutual Fund, if RBI keeps on doing such OMOs as per their pattern, it may continue to benefit the 10-year bonds.
“Long-duration funds will benefit, but it also raises the question whether it will sustain as fiscal situation is not comforting. So, while we will see the benefits in the near term, we need to see how future OMOs play out,” Srivastava added.
It will be the first time on December 23 when RBI will be conducting a special open market operation (OMO), similar to the ‘Operation Twist’ carried out in the United States near the start of the decade.
RBI in a release on Thursday said that on a review of the current liquidity and market situation and an assessment of the evolving financial conditions, it 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.
Source: Economic Times