RBI’s ‘Operation Twist’ to ease money markets

The Reserve Bank of India (RBI) has stepped in to provide some relief to money market participants. The banking regulator has announced a simultaneous sale and purchase of bonds under Open Market Operations (OMO) for ₹10,000 crore on December 23.

This is the first time the central bank will simultaneously sell and purchase bonds in a move that is similar to the U.S.'s 'Operation Twist' carried out in 2011 and 2012. The decision to conduct the special OMO is based on RBI's review of the current liquidity and market situation and an assessment of the evolving financial conditions.

Given inflationary concerns, economists feel, 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 Union Budget in February to revive the economy which stokes concerns of fiscal slippage and could lead the benchmark 10- year bond yields to rise further.

After five straight rate cuts of a total 135 basis points, RBI governor Shaktikanta Das headed six-member Monetary Policy Committee (MPC) hit the pause button for need for greater clarity on inflation trajectory and the scope of fiscal measures that could be undertaken by the government in the upcoming Union Budget.

On December 5, the MPC sprung a surprise when it unanimously voted to keep the benchmark repo and reverse repo rates unchanged at 5.15% and 4.9% respectively. All six members of the panel had voted to continue with the accommodative stance “as long as it is necessary to revive growth, while ensuring that inflation remains within the target”.

While the MPC's main mandate is to rein inflation at 4% within a band of +/- 2% in the medium term, the foundering economy was hoping for a shot in the arm in the form of a rate cut to revive the growth cycle. More so, because the RBI has cut its growth target to 5% from 6.1% for FY20, and 5.9%-6.3% for the first half of FY21.

The central bank has raised its inflation estimate to 5.1% -4.7% for the second half of FY20 and 4%-3.8% for the first half of FY21. The heightened concerns around inflation mainly stem from rising vegetable prices, and incipient price pressures seen in other food items like milk, pulses, and sugar.

Also, the government is likely to announce fiscal measures to boost demand in the upcoming budget. The RBI said it was "prudent to carefully monitor incoming data to gain clarity on the inflation outlook. Similarly, the forthcoming union budget will provide better insight into further measures to be undertaken by the government and their impact on growth."