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The Reserve Bank of India decided on Thursday to recapture its bond swap program scheduled as Operation India’s Twist with the aim of aiding monetary transmission.
The RBI said it will carry out the buying and selling of government securities in open market operations (OMOs) for Rs10,000 crore each on April 27.
Typically, the central bank makes OMO sales to absorb excess liquidity in the financial system, or OMO purchases to infuse liquidity in a single day.
The central bank will buy long-term securities with a maturity of 6 to 10 years, totaling Rs 10,000 crore, while it will sell short-term securities maturing in June 2020, October 2020 and April 2021.
The yield on the benchmark 10-year note fell 20 basis points to 6.02% on Thursday from the previous close of 6.22% after the announcement.
Bankers see this as a move to neutralize liquidity in the system, as RBI seeks to lower rates. “RBI is looking to buy liquid papers from G-sec. Rates are expected to drop even on corporate bond papers. This will force banks to transfer lower rates to customers, “said the head of treasury at a public sector bank.
The simultaneous sale and purchase of government bonds by the central bank, in line with Operation Twist of the United States Federal Reserve, is expected to spur private sector lending. RBI had last used this tool in January, when the debt market was showing signs of stress due to the Rs7.1 lakh crore government loan program for fiscal year 2019-20. Governor Das had admitted that Operation Twist had helped improve the transmission of the central bank’s 135 basis points of rate cuts last year.
With government loans for the current fiscal year at a record Rs7.8 lakh crore, bond traders are expecting another 5 rounds of money orders to be announced within 2-3 weeks.
“RBI’s purchase of secondary market T-notes in the first week of April has reduced the T-note rate below the reverse repo rate. This has resulted in monetary transmission at the shorter end. However, long-term stock returns have not been affected. Operation Twist will therefore help RBI move that transmission to the longer end, “said Naveen Singh, senior vice president, ICICI Securities Primary Dealership Ltd.
