RBI notified that it will buy long-dated bonds maturing in 2026, 2028, 2029 and 2030 while it will sell short-dated securities maturing between June 2020 and April 2021. Both the purchase and sale will be worth Rs 10,000 crore each.
Bonds rallied on Thursday with the market cheering the announcement of Operation Twist by the Reserve Bank of India (RBI) through which the central bank will simultaneously buy and sell long-dated and short-tenor government securities, respectively, via open market operations (OMOs).
The benchmark yield closed 16 basis points down at an 11-year low of 6.06%. During the day, the yield fell to as low as 6.01%. RBI notified that it will buy long-dated bonds maturing in 2026, 2028, 2029 and 2030 while it will sell short-dated securities maturing between June 2020 and April 2021. Both the purchase and sale will be worth Rs 10,000 crore each.
Independent market expert Gopikrishnan MS said the central bank is definitely anticipating additional borrowing by the government and in the run-up to that, it has commenced this twist operation to reduce the burden of additional supply on the market. “Revenues are going to crash this year and you need additional money to manage the Covid-19 crisis. It’s too early to predict the extra borrowings that may be needed, but the current estimates are anywhere around `2.5-3 lakh crore. RBI could be looking at buying Indian government securities through OMOs, auctions and switches (operation twist) to the tune of this amount during this fiscal,” Gopikrishnan said.
The central bank had earlier conducted its ‘Operation Twist’ in December last year when the term premia — the difference between the policy repo rate and the government securities’ yield – was moving higher. Going forward, experts say a lot will depend on the announcement of the second fiscal package by the government as well as RBI’s plan to tackle the potential additional borrowing by the government.
Siddharth Shah, head of treasury at STCI Primary Dealer, believes the endeavour is to bring the long-term rates down and eventually pass on the reduction in these rates to the lending rates in the economy. “A crucial impact of this will be a reduction in the government’s borrowing costs. The 10-year benchmark yield can definitely go to 5.75%. That will happen by the end of June and will depend on how the government brings the fiscal package and what has been planned by RBI in this context. In the absence of further knowledge, the market is taking the OMO news very positively which is reflecting in the yields,” Shah told FE.