RBI buys and sells bonds worth Rs 10,000 cr in third open market operation

Long-term bond yields have come down by 20 bps since first OMO last month

The Reserve Bank of India (RBI) on Monday conducted its third special open market operation (OMO) where it bought long-term bonds and sold short-term tenure bonds to correct the yield spread. 

The cut-off yield for the de-facto 10-year bond (9-year now) came at 6.54 per cent, three basis points lower than the market close on the paper. The central bank bought three papers maturing between 2024 and 2029. The total amount offered by the participants were Rs 64,505 crore for a purchase plan of Rs 10,000 crore. 

Unlike the past two OMOs, the central bank sold its full quota of Rs 10,000 crore in short-term bonds. 

The long-term bond yields have come down by about 20 basis points since the first OMO was announced last month. The idea is to bring down long-term yields, so that transmission happens and possibly help the government borrow at a cheaper rate. 

Source: RBI

But the drop in yields have also helped some investors to get out of their bond portfolio as the scope for future rate cuts seem limited for the central bank. But foreign portfolio investors remained fairly bullish on government bonds, indicated by them using up 74.08 per cent of their allotted limits for such bonds. 

Meanwhile, the central bank also conducted a 70-day cash management bill (CMB) auction, in which it moped out Rs 30,000 crore of liquidity from the banking system. The CMBs are issued to meet temporary cash need of the government, and is also an effective tool for removing liquidity. 

The banking system liquidity had crossed Rs 4 trillion on bond redemption and government spending.