RBI purchases bond via OMOs at better than market rates

By: |
December 24, 2019 2:14 AM

The central bank sold Rs 6,825 cr worth of short-dated securities against the Rs 10,000 cr amount that was notified.

rbi, reserve bank of indiaThe announcement resulted in a rally in long-tenor bonds along with a bit of hardening in short-tenor yields on Friday.

The Reserve Bank of India (RBI) has completed the purchase of the benchmark bonds worth Rs 10,000 crore through open market operations (OMOs) at better than market rates, which implies its strong intent of bringing down the term premia, experts said.

The yield on the benchmark bonds had traded at an intraday low of 6.553% on Monday before closing the day’s session at 6.568%. However, the cut-off yield at which the OMO purchase took place stood at 6.546%. At the same time, the central bank only sold Rs 6,825 crore worth of short-dated securities against the `10,000 crore amount that was notified.

Ananth Narayan, professor-finance at SPJIMR said the “operation twist” OMO cut-off announced by the RBI was positive for government bonds on multiple counts.

“For one, the RBI purchased Rs 10,000 crore of the 10-year bonds at a cut-off of 6.546%, a lower yield than seen in the secondary market during the day. Second, it sold only `6,825 crore of 1-year bonds, indicating that it did not want short-term bond yields to go up significantly. In effect, it ended up net buying Rs 3,125 crore of bonds. All this will signal its strong intent to bring down term premium in government bonds, while at the same time ensuring that short-end bond yields do not move up,” he said.

A dealer also pointed out to the fact that the central bank’s intention to buy the long-tenor bonds was successfully executed and that too at better than market levels. “From that perspective, it is a very good cut-off that has come. The sale of short-dated securities did not happen fully but I believe that the market may not be perturbed by this. The RBI may not want the short-tend yields to shoot up beyond a certain level,” the dealer said.

The RBI on Thursday had announced the Indian version of “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 (OMO).

The announcement resulted in a rally in long-tenor bonds along with a bit of hardening in short-tenor yields on Friday. The yield on the 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%. The benchmark yield had fallen 15 basis points after the announcement.

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