Central bank plans Indian version of ‘Operation Twist’

MUMBAI: The Reserve Bank of India (RBI) 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 special open market operation (OMO) of this kind, similar to the ‘Operation Twist’ carried out in the US near the start of the decade.

Bond yields have been rising since the RBI unexpectedly left its key repo rate unchanged earlier this month, even as it slashed its forecast for economic growth to its lowest in over a decade.

The RBI said it will buy ₹10,000 crore worth of the current benchmark 10-year bond while selling four bonds maturing in 2020 for an equivalent amount.

“The action of Operation Twist by the RBI today is encouraging,” said Madhavi Arora, economist at Edelweiss Securities.

“We have been arguing that RBI should work towards reducing the term premium for real economy gains. The current steep yield curve barely reflects the true state of the economy,” she added.

RBI said it had decided to conduct the special OMO after reviewing the liquidity and market situation and assessing financial conditions.

Most market participants expect the government to announce measures to tackle the growth slowdown in the federal budget in February while there are serious concerns of fiscal slippage this year, too. “The RBI possibly knows something that the market doesn’t. Everyone knows there is going to be a fiscal slippage and possibly they feel its going to be large enough and they need to manage bond yields,” a senior debt trader at a private bank said. “The 10-year bond yield could fall by 7-8 bps at open and by around 15 bps eventually,” he added.