RBI to buy and sell bonds worth Rs 10,000 cr via open market on Dec 23

Move signals lower bond yield at the long end

The Reserve Bank of India (RBI) will simultaneously buy and sell government bonds worth Rs 10,000 crore each on December 23, through Open Market Operations (OMOs), signalling its intent to lower yields on long-term bonds.

On a review of the current liquidity and market situation and an assessment of the evolving financial conditions, the RBI has decided to buy government bonds maturing in 2029 and sell four securities aggregating Rs 10,000 crore which will mature in 2020.

Madan Sabnavis, chief economist at CARE Ratings, said through such operations the RBI is trying to smoothen the yield curve and signalling correction in yield at the long end (especially 10-year bonds).

The concept is similar to Operation Twist used by the Federal Reserve in 2011-2012. It had swapped short-term treasury securities for longer-term government debt, which reduced the gap between two- and 10-year yields.

ICICI Bank in a market round-up report said government bonds ended lower on Thursday as market participants booked profits after a sharp rise in prices over past two days.

RBI Governor Shaktikanta Das’ comments on fiscal slippage deepened the concerns of extra borrowing and weighed on market sentiments. The 10-year benchmark yield ended at 6.75 per cent compared to the previous close of 6.71 per cent.

Analysts said the RBI is buying long-term paper and selling short-term paper. The liquidity at the system level remains intact and allows the government to borrow at lower cost.

Liquidity in the banking system continued to be surplus in the week ended December 13, 2019. The estimated liquidity surplus in the banking system was over Rs 2.45 trillion on all the days of the week. The liquidity surplus has seen the RBI undertaking term (variable rate) reverse repo auctions in order to drain out liquidity from the banking system.

The move had been suggested by some traders and strategists as a way to transmit more of the central bank’s rate reductions to businesses and individual borrowers. With investment and consumption both weak in India, policy makers are trying to spur credit and boost economic growth from a six-year low.

Not all agree the RBI’s move will work.

Selling shorter bonds may blow up yields given heavy trading positions in that segment, ICICI Securities Primary Dealership said in a recent note. It’s also possible that while the RBI may lower long-term yields, abundant cash in the banking system will cap shorter yields.