The Reserve Bank of India (RBI) on Monday announced the much-awaited special open market operations (OMOs) wherein it is intending to simultaneously buy long-term securities and sell short-dated securities worth Rs 10,000 crore each.
The central bank is looking to sell treasury bills maturing in 2020 and 2021, while intending to buy government securities maturing between 2027 and 2033. The auction will be held on Thursday. Market participants say the announcement is in line with expectations and is expected to keep a tab on bond yields.
Vijay Sharma, senior executive vice-president at PNB Gilts, said he does not expect an impact of more than 3-5 basis points in the benchmark yield due to the Operation Twist announcement. “It was broadly expected that RBI will conduct OMOs towards the end of this quarter. My feeling is this could be a one-off announcement without any further announcements in the near term. RBI should be comfortable with where the bond yields are right now. Unless yields start spiking or additional borrowing is announced, the central bank may keep doing OMOs intermittently. The benchmark yield should settle in the range of 5.95-6.10%,” Sharma said.
The benchmark yield had recently hit over one-month high levels due to consistent supply of central government securities and the absence of any measures from RBI to absorb the excess supply of bonds. The government has been borrowing more than the notified weekly amount over the last few weeks. For instance, during Friday’s auction, the government borrowed Rs 32,000 crore against the notified amount of Rs 30,000 crore from the market by exercising the greenshoe option. Dealers had earlier said unless the central bank steps in to absorb some of the additional supply of bonds, yields may spike in coming times.
Ananth Narayan, professor-finance at SPJIMR, is of the view that RBI will conduct as many of such operations as is necessary to keep yields under control. “RBI is preserving ammunition and that is why I think they are not explicitly stating the amount of Operation Twists/OMOs that they intend to do. This should be a record year in terms of such operations from RBI like TLTROs, Operation Twists etc. We could see the central bank monetising about 3-4% of GDP by ways of these operations. The bond market will have comfort that RBI will step in if necessary and 6% should be the cap on the benchmark yield in the short term,” Narayan said.
On Monday, the benchmark yield closed two basis points down at 5.90 %. The announcement about the special OMOs came after market hours.
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