RBI plans local version of ‘Operation Twist’ to lower yields.

RBI plans local version of ‘Operation Twist’ to lower yields.

MUMBAI: 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 the RBI has conducted a unique open market operation (OMO) of the kind, similar to the’Operation Twist’ completed in the United States near the start of the decade. The RBI said it will buy 100 billion rupees’ ($1.4 billion) value of their current benchmark 10-year bond when promoting four bonds maturing in 2020 for an equal amount.

“The action of Operation Twist from the RBI today is encouraging,” said Madhavi Arora, economist at Edelweiss Securities. “We’ve been arguing that RBI should work towards reducing the term premium for actual market gains. The current steep yield curve hardly reflects the real state of the economy,” she added.

The central bank said it hade decided to run the OMO after assessing financial conditions and reviewing the liquidity and market situation. Most market participants expect the authorities to announce steps to tackle the growth slowdown in the national budget in February while there are concerns of slippage this year, also. The government may thus be forced to borrow more from the market to fund its fiscal deficit that could push bond yields up more.

The grade 10-year yield had risen up to 37 basis points to 6.84percent from its level prior to the RBI shocked markets by keeping rates steady this month. It is now up 28 bps. The yield curve has steepened sharply having cut the key repo rate by 135 bps since February. “The RBI possibly knows something that the marketplace doesn’t. Everyone knows there is going to be a financial slippage and possibly they believe its going to be large enough and they should handle bond yields,” a senior debt trader at a private bank said. Simultaneously buying long-end bonds and selling short-end bonds must result in a flattening of the yield curve.

But traders said it was not clear whether there are a collection of auctions or the one. They are hoping the RBI will step in to prevent sharp rises in returns at a time when there is a clear need to promote growth.

Author: topgamernews

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