RBI bond introduces Operation Twist
The Reserve Bank of India (RBI) came up with a bond-swapping programme and coined it as Operation Twist. RBI had announced that it would conduct a synchronous buying and selling option under the Open market operations (OMO). So, an OMO of ₹10,000 Crores each was held on 27 April, 2020. The RBI mentioned that the 10,000 Crores amount will be made up of purchase of long term securities having tenure of 6 to10 years.
The sale amount of 10,000 Crores will be made up by selling short term securities having maturity dates like June 2020, October 2020 and April 2021. Short term further having two categories of cash management bills, one of 77 days and another of 84 days and two treasury bills of 182 and 364 days respectively. These short term bills are being put on sale by the RBI keeping in mind the interim cash mismatches the government is facing recently due to economic difficulties the pandemic has produced.
Auction result reveals that the cut-off yields on which the RBI bought securities was much higher than secondary market.
To illustrate:
1) 7.26% Government security (G-sec) 2029 which had secondary market return of 6.38% was bought at 6.4%.
2) 7.59% G-sec 2026 was bought at 5.9% versus the secondary market that gave 5.8%.
Under this programme, the aggregate amount of Face Value (FV) notified by RBI was 10,000 crores, against which the participants offered a total amount of 64,746 crores . RBI received bids that were six times more than the FV of the bonds. On the other hand, bids received for the sale of securities were nearly five times than the offer, which amounted to nearly ₹50,260 Crores. The near term paper was giving lower yield than normal. The Operation Twist further aggravated the same.
When and why does the Central Bank conduct an OMO?
Generally, the OMO sales are undertaken when the RBI wants to take out excess liquidity from the system. Whereas, OMO purchases are done to infuse instant money into the market. Recently, RBI was seen carrying out these operations to balance the sovereign yield curve. Particularly, ensuring lower returns at the shorter end of the curve.
Referring to the auction results, Naveen Singh, senior VP, ICICI Securities Primary Dealership says since RBI could buy securities at higher percentages, this believably implies that the banks are interested to book profit on the stock.
The Stocks which were held previously for maturity were made available for sale. Inversely, the cut-off rates on the sale of near-term paper was lower than prevailing market rates. For example, the 364-day T- bill was auctioned at 3.9%, when the market rate stood 4.074%. Distinctly, the RBI is desirous to lower the interest rates at the shorter end. This move is taken to enable an economic comeback against the upset which the pandemic has produced.
