RBI’s another Twist; what buying, selling govt debt means for bond yields, liquidity, share market

By: |
August 26, 2020 10:45 AM

The Reserve Bank of India’s decision to buy and sell government debt worth Rs 20,000 crore through open market operations brought the 10-year bond yield down on Tuesday but market participants are not convinced in how long it will stay there.

CBDC can also enable many financial entities to settle directly with RBI.RBI will purchase bonds maturing in 2024, 2027, 2030, and 2032 using the multiple price auction method tomorrow. On the other hand, the central bank will sell short term bonds, all maturing in 2020.

The Reserve Bank of India’s decision to buy and sell government debt worth Rs 20,000 crore through open market operations (OMO) brought the 10-year bond yield down on Tuesday but market participants are not convinced in how long it will stay there. The 10-year bond yield closed at 6.15% on Tuesday, down from its 6.22% closing on the previous day. The central bank’s ‘Operation Twist’ is being termed by many as a step in the right direction. “Rs 20,000 crore OMO is a good beginning, but we need more such measures for a substantial and lasting impact,” said Deepak Jasani, Head – Retail Research, HDFC Securities.

RBI will purchase bonds maturing in 2024, 2027, 2030, and 2032 using the multiple price auction method tomorrow. On the other hand, the central bank will sell short term bonds, all maturing in 2020. “By purchasing and selling different maturity bonds, RBI intends to manage the yield curve,” Jaikishan Parmar, Sr Equity Research Analyst, Angel Broking told Financial Express Online. “This will create demand for long-dated bonds and increase the supply of the short term bond. This action of RBI would lead to rising short-term yields and lower long term yields. If long term rates remain lower it will help the Indian economy to revive,” he added.

With OMOs the RBI aims to keep a check on the liquidity in the market. The RBI will buy bonds from the open market when it wants to infuse liquidity into the system, and sell bonds to absorb liquidity. The move will also help keep a check on the rising yields. “Bond Yields have fallen but will they remain at these levels post the OMO is something we are not sure. The gap between the 10-year yield and the short term yield continues to be quite steep, RBI will have to think about unique measures to bridge this gap,” Deepak Jasani told Financial Express Online. 

Analysts say that the impact on liquidity however, has not been much considering the size of the action. “Size wise this does not seem to have an immediate impact on Liquidity,” said Sriram B K R, Investment Strategist, Geojit Financial Services. He added that the OMO could either be an effort to lift the borrowing or to meet the gap faced by the banking system. Meanwhile equity markets are expected to continue following global peers. “The equity markets continue to rise following global equities, the open market operation by the RBI which is mostly influencing the yields is not expected to have much of an impact on the Indian equity market,” said Abhishek Bansal, Founder Chairman, Abans Group.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Wall Street hits near 7-week low on Coronavirus fears, stimulus fog
2Investors become poorer by Rs 4.23 lakh crore in massive market selloff 
3Chemcon Speciality Chemicals IPO subscribed over 5 times on first day of bidding