RBI announces outright purchase of Rs 10k-cr of bonds from secondary mkts

The central had till now been simultaneously buying and selling bonds of equal amounts to keep the operation liquidity neutral.

The Reserve Bank of India (RBI) on Thursday announced it would go for an outright purchase of Rs 10,000 crore of bonds from the secondary markets on September 24. 

So far, the central bank has been simultaneously buying and selling bonds of equal amounts, with an intention to keep the operational liquidity neutral. 

But this is the first time in this fiscal year (April 2020-March 2021, or FY21) that the central bank has announced an outright open market operation (OMO) purchase. In OMOs, the RBI buys or sells bonds from the secondary markets.  

The RBI had last done an outright OMO purchase operation on March 26, of Rs 15,000 crore. 

After that, all the OMOs were simultaneous buy and sell operations, in which the central bank bought long-term securities and sold short-term securities. 

This exercise is also called ‘Operation Twist’ in market parlance.  

In the latest round of the outright OMO purchase, the RBI would be buying bonds maturing between 2026 and 2031. The central bank said it was doing so in view of the “current liquidity and financial conditions”.

Even though the liquidity surplus in the banking system has come down from its recent highs of Rs 7 trillion to Rs 4.67 trillion as of Wednesday, it is still at a huge surplus. 

However, investors now expect the banking system to have a good amount of surplus liquidity, and a substantial reduction in this puts pressure on bond yields. The RBI may have wanted to arrest that before yields climb up, say experts.

“We still have a long way to go insofar as the borrowing programme is concerned,” said R K Gurumurthy, head of treasury at Lakshmi Vilas Bank. 

The government’s annual borrowing target is Rs 12 trillion, of which more than half has been borrowed at near 6 per cent yields, which is a decade-low cost of borrowing for the government, RBI Governor Shaktikanta Das said on Wednesday. 

The 10-year bond yield closed at 6.03 per cent on Thursday.  

However, the outright OMO announcement has important ramifications for the future.

The bond market has been demanding an OMO calendar, and expects the central bank to chip in with at least Rs 2-3 trillion of OMO support to accommodate the heavy borrowing programme. This is also a kind of indirect monetisation, and the central bank has tried to avoid that. 

But experts say the OMO announcement removes any such doubt that it is the beginning of many such operations to come.

“If the RBI does large amounts of OMO, or gives a calendar, or even announces an intent to do more, that could cool yields a bit and help the large borrowing programme to be done in the second half sail through without pushing yields higher,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.  

With the announcement of the OMO, the central bank also said it would convert some bonds maturing between April, 2021, and December 2022 for securities maturing between 2031 and 2060. 

The RBI said it conducted a special OMO of simultaneous buy and sell of Rs 10,000 crore.