RBI scraps Rs 10,000-crore OMO, plans to conduct Operation Twist

The Reserve Bank of India (RBI) on Thursday refused to go ahead with its planned bond purchase from the secondary market, even as it received more than six times the bid for its Rs 10,000-crore open market operation (OMO).

Instead, the central bank announced a special OMO of Rs 10,000 crore, to be conducted on October 1, where it would simultaneously buy and sell bonds to keep system liquidity intact. In such special OMOs, the RBI buys long-term papers and sells short-term securities, an exercise also called ‘Operation Twist’ in market parlance.

Thursday’s exercise was, however, an outright purchase OMO, where the central bank received bids of Rs 66,473 crore. This was the first outright OMO purchase planned in this financial year. The last outright OMO purchase was done on March 26 when the central bank bought Rs 15,000 crore. 

Since then, the favoured mode of yield management has been special OMOs where more often than not the central bank bought more than it sold.

Bond market participants were disappointed because the central bank in the past has refused to sell 10-year bonds at rates the market wanted the RBI to pay.  

“There is a huge supply of bonds and rates will have to go up commensurate to that. But the central bank wants the markets to buy bonds and at a cheap rate. The both don’t add up,” said a senior bond dealer requesting anonymity.

However, the RBI could be trying to not get cornered by the market, as has already happened in other global markets. Investors, in quest for making quick profits, have induced volatility in the bond market. Market participants globally are asking for higher yields, and when liquidity measures announced by the central banks are cooling down yields, investors are squaring off their positions. Yields and prices of bonds move in the opposite direction.