RBI steps into bond market with Operation Twist to cool down yields

The rise in bond yields have been rather alarming this month. The 10-year bond yields were at 5.77 per cent on April 4 but rose to 6.17 per cent by Monday.
Yields fell on Tuesday after the Reserve Bank of India (RBI) said it would buy and simultaneously sell Rs 20,000 crore of bonds from the market in two equal tranches.

Such buy-sell transactions are commonly called Operation Twist. Under this mechanism, the central bank buys long term bonds and sell short-term bonds. This cools down the long term yields, raises the short-term yields, but keeps the liquidity neutral.

The operations will be conducted on August 27 and September 3. In the first operation, bonds maturing between 2024 and 2032 will be purchased, while bonds maturing between October and November this year will be sold. In the past few such Operation Twists, the central bank has bought more than it managed to sell.

The market was expecting an open market operations (OMO) calendar, which would outline how much of bonds the central bank can buy from the secondary markets in total. The 10-year bond yields fell to 6.129 per cent, from its previous close of 6.165 per cent after the central bank announced its OMO in the morning. The central bank buys and sells bonds from the market through its OMO operations.

The central bank chose to kept the element of surprise, but the bond market participants are reassured that the central bank will chip in as and when necessary to cool off bond yields. An OMO announcement also shows the comfort zone of the central bank and this should stabilize yields going forward, bond dealers said.

“This is a good start. Market is now hoping and assuming they will do much more. The last devolvements and the MPC (monetary policy committee) minutes reaction of the market would persuade them to do more in coming days is the assumption,” said Harihar Krishnamurthy, head of treasury at First Rand Bank.

On August 15, the Reserve Bank of India (RBI) planned to sell Rs 30,000 crore through four bonds, including Rs 18,000 crore of the new 10-year bonds. However, Rs 4,637.93 crore of the planned amount remained unsold. Interestingly, the 10-year bond was introduced just a fortnight back, replacing a 10-year security that was retired just after three months.

The rise in bond yields have been rather alarming this month. The 10-year bond yields were at 5.77 per cent on April 4 but rose to 6.17 per cent by Monday.
RBI governor Shaktikanta Das said in a recent interview that being the government’s debt manager, the RBI will take necessary steps to ensure that Rs 12 trillion of borrowing programme is conducted smoothly.

With such intermittent OMO auctions, the markets will not have much reasons to complain either.

“Market was expecting a OMO calendar, but the market reaction shows they are happy with the announcement,” said Devendra Dash, head of treasury at AU Small Finance Bank.

The OMO announcements indicate that the RBI is back in the markets, after staying away from it for a couple of weeks, said Joseph Thomas, Head of Research - Emkay Wealth Management.

While that should calm the fixed income markets to some extent, “the pressure at the long end of the curve is certainly going to stay with fresh primary issues lined up for the rest of the year,” Thomas said.

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