RBI conducts first ever Operation Twist
RBI BOUGHT ₹10,000 CR OF LONG-TERM BONDS AND SIMULTANEOUSLY SOLD ₹6,825 CR OF SHORT-TERM PAPER UNDER A SPECIAL OMO
MUMBAI: The Reserve Bank of India (RBI) on Monday said it bought ₹10,000 crore of long-term bonds and simultaneously sold ₹6,825 crore of short-term paper under a special open market operation (OMO).
Thus, while the bond market was satisfied with the RBI’S offer price for buying long-dated securities, it was not entirely happy buying the full component of the ₹10,000-crore of short-term securities listed for sale.
According to market experts, the reason for the shortfall in the sale, despite over ₹20,000 crore offered by buyers, is that bidders quoted a higher yield or a lower price than the cutoff. Prices and yields move inversely in bonds.
Experts added that participants in the auction were willing to buy these bonds at a lower price than what RBI was willing to sell them for.
The central bank had set the cutoff yield and price for the four short-term securities, of roughly one-year tenor, at between 5.28-5.60% and between ₹100.37-102.32, respectively. “The purpose of this entire exercise is to correct the yield curve and if the price or yield quoted does not match that of the central bank’s expectations, then the purpose is defeated,” said a senior official at a private sector bank.
RBI said in a statement on Monday that it received 116 bids worth ₹20,330 crore for sale of short-term government securities.
Of these, the central bank said, it accepted 35 bids of ₹6,825 crore.
On the other hand, RBI bought ₹10,000 crore worth of the 10-year benchmark bonds from 145 participants. The central bank said it received bids from 161 sellers worth ₹20,826 crore. The cut-off yield and price for the 10-year paper was at 6.54% and ₹99.3, respectively. Meanwhile, the 10-year benchmark bond yield fell 3bps on Monday to 6.57%.
“It looks like the RBI is working towards lowering the longterm yields further because they had a cut-off of 6.54% for the longterm bond.
The 10-year bond yield stood at 6.6% on Friday. I think there will be a series of such operations till the time RBI is satisfied with the yield,” said Madan Sabnavis, chief economist at CARE Ratings.
Mint reported on December 22 that RBI’S simultaneous sale and purchase of government bonds, on the lines of the US Federal Reserve’s Operation Twist, is expected to dampen term premium to stimulate private sector borrowing, as well as aid the government’s borrowing programme by making it cheaper.
The central bank had announced on December 19 that it will conduct simultaneous sale and purchase of ₹10,000 crore of government securities of varying tenor on December 23.