The Reserve Bank of India (RBI) has announced a second round of Operation Twist to lower long-term bond yields and address liquidity issues.
“On a review of the current liquidity and market situation and an assessment of the evolving financial conditions, the Reserve Bank has decided to conduct one more simultaneous purchase and sale of government securities under Open Market Operations (OMO) for ₹10,000 crore each on December 30,” the central bank said on Thursday.
The RBI will purchase benchmark government securities worth ₹10,000 crore, and simultaneously sell short-term government bonds worth ₹10,000 crore on December 30. This will be the second special OMO conducted by the apex bank in December.
The banking regulator had announced the first simultaneous sale and purchase of bonds under a special OMO for ₹10,000 crore on December 23 to provide some relief to money market participants.
The RBI’s ‘Operation Twist’ aims to address liquidity issues and lower long-term bond yields. The auction results of the first round reveal that while the central bank bought 10-year bonds worth ₹10,000 crore, it managed to sell one year short-term bonds worth ₹6,825 crore.
The RBI announced it had received 116 bids worth ₹20,330 crore for sale of short-term government securities. The central bank said it had accepted 35 bids to the tune of ₹6,825 crore.
Simultaneously, the RBI had purchased 10-year benchmark bonds from 145 participants worth ₹10,000 crore, although it said it had received bids worth ₹20,826 crore from 161 sellers. The cut-off yield for the 10-year bonds was 6.54% and was priced at ₹99.3.
Economists and money managers say the deficit in the sale in round one was mainly because the auction participants quoted a lower price than the cut-off fixed by the RBI at ₹100.37 to ₹102.32. The cutoff yield for the short-term securities of one-year tenure was set between 5.28% to 5.60%.
This was the first time the central bank conducted an auction to simultaneously buy and sell bonds. Experts say the move is very similar to the 'Operation Twist' carried out by the U.S. Fed in 2011-2012. The decision to conduct the special OMO was based on the RBI’s review of the current liquidity and market situation and an assessment of the evolving financial conditions.
Given concerns over inflation, economists say, there may be little room for the RBI to cut rates further in the coming months. The government is largely expected to announce pro-growth measures in the upcoming Budget in February to revive the economy. There are concerns of fiscal slippage, which could result in the benchmark 10-year bond yields rising further.
After five straight rate cuts of a total 135 basis points, the six-member Monetary Policy Committee (MPC) led by RBI governor Shaktikanta Das hit the pause button and sprung a surprise by unanimously voting to keep the benchmark repo and reverse repo rates unchanged at 5.15% and 4.9%, respectively, on December 5.