RBI to again conduct special open-market operation on December 30

The Reserve Bank of India (RBI) will conduct one more simultaneous bond purchase and sale in the secondary markets, which has come to be known as India’s version of operation twist. 

The RBI, in a notification, said it will purchase 10-year bonds worth Rs 10,000 crore, while simultaneously selling four bonds maturing in 2020 for up to the same amount.

It conducted such an operation on earlier this week on Monday, the next such open market operation (OMO) will happen on Monday. In that auction, the RBI bought its full quota of 10-year bonds, but sold just Rs 6,825 crore, in aggregate, of short-term bonds maturing in the next year.

After the announcement of the first OMO last week, the yields on the 10-year bonds had fallen more than 15 basis points. On Monday, the cut off yield had come at 6.546 per cent. On Thursday, the 10-year bond yield closed at 6.58 per cent.

Bond dealers said that to bring down the longer-term yields, the central bank will have to continue doing such OMOs, otherwise, the 10-year bond yields will climb back to 6.75 per cent level, even as the short-term bond yields don’t climb up much. Through such OMOs, the RBI is trying to address the spread between one year and 10-year bonds that had climbed up to more than 160 basis points.

Softening of long term yields help the government borrow extra at a cheaper rate, given that the fiscal deficit is likely to widen. Besides, the borrowing costs for states and corporates also come down marginally if the 10-year bond yields soften.

At the same time, since most banks have pegged their retail lending rates to repo, the rise in short-term yields may not make loans costlier by an equal margin since the repo is unlikely to rise from here for a long time. In fact, analysts expect the central bank to cut repo even further.