RBI to buy and sell Rs 10,000 cr in bonds to manage its balance sheet

According to the latest available figures, the Reserve Bank of India had about Rs 9 trillion worth of bonds on its books

The Reserve Bank of India (RBI) on Thursday said it will sell Rs 10,000 crore worth of short-term bonds, and buy an equivalent amount in long-term debt on Monday.
 

This is a revenue and liquidity neutral operation, possibly aiming at the central bank's balance sheet management, though the RBI did not specify a reason.
 

However, the long-term bond yields fell after the open market operation announcement. The 10-year bond yield fell 17 basis points to 6.052 per cent from its previous close of 6.223 per cent.
 

A similar exercise was undertaken by the RBI in the past to bring down long-term bond yields to help the government borrow. Given the similarities with a US Fed operation, it was called Operation Twist by market participants.
 

The four bonds that the central bank plans to sell in the secondary market mature between June 16, 2020, and 15 April 2021. In lieu of that, the RBI will buy from the market four bonds that mature between January 11, 2026, and May 9, 2030. The RBI did not specify any security-wise limit for the bonds.

 

According to the latest available figures, the RBI had about Rs 9 trillion worth of bonds on its books. This may have increased even more by now given its secondary-market purchases.

However, banks have been parking Rs 7 trillion-plus excess liquidity with the central bank. Against this liquidity operation, the RBI will have to give bonds as security.

Therefore, the RBI is replenishing its short-term stock with longer-tenure bonds in order to carry on with its liquidity operations seamlessly, say market experts.
 

There are other options, too, that the central bank can explore at a later date, including capping how much bonds can park at the reverse repo window, issuing special bonds under the Market Stabilisation Scheme to absorb excess liquidity, or even introduce Standing Deposit Facility where banks can park excess liquidity without collateral, but at a lower rate than the reverse repo.
 

Important to note here is that this is not monetising the deficit of the government, as the transaction is revenue and liquidity neutral, say bond dealers.