Debt fund managers and traders will closely monitor the Reserve Bank of India (RBI) for cues on Operation Twist as factoring in timing and quantum of these market operations has become key to optimising portfolio returns with long-term yields susceptible to sharp easing from these measures.
Operation Twist is a market term for special open market operations (OMO) conducted by RBI, where it buys long-term government bonds and sells short-term ones.
RBI has conducted the operation four times so far. However, the central bank bought more bonds than it sold, which is akin to the traditional OMO purchases in which it directly buys dated bonds from the secondary market. The first such special OMO operation was announced on December 19.
“This is the first monetary policy after Operation Twist was announced. So far, RBIs intervention has not been anchored to any stated objective — targeting yield curve or spread compression. This can lead to sharp variations in performances between funds with higher exposure to longer-tenure government securities (G-secs) and those with lower exposure," said Arvind Chari, head-fixed income and alternatives, Quantum Advisors.
Fund managers say the RBI intervention in markets will be easier to monitor if it is pegged to reaching a particular threshold on absolute long-term yields, or alternatively focused on bringing down the spreads to a level such as 100 basis points (bps), from 135 bps at present.
“With RBI’s routine OMO, markets have some predictability as these are usually linked with structural liquidity. But, with Operation Twist there is not yet any quantifiable measure to gauge the interventions,” said a fund manager.
“Some participants expect operations to continue, some have doubts. RBI’s post-policy comments will help in taking more informed view,” said A Prasanna, head of research at ICICI Securities Primary Dealership.
Between the first two rounds of Operation Twist, the yields on 10-year G-Secs had eased 30 basis points from 6.8 per cent to 6.5 per cent.
The government will be borrowing Rs 8.1 trillion in fiscal 2020-21, and the market expects RBI to extend a helping hand by conducting OMOs and special OMOs. The scope for those, however, are getting limited considering the system liquidity is over Rs 3 trillion now. If the RBI does OMOs, the system liquidity will shore up.
“Bond yields will now be anchored, because the news related to bond indices has been taken positively by the market. However, it is a near-term phenomenon. The fiscal uncertainty is huge and will become clearer from April-May,” said a senior economist, requesting anonymity.
(Anup Roy contributed to this story)