RBI announces straight purchase of government securities worth ₹10,000 crore

The Reserve Bank of India (RBI) on Thursday said it will purchase government securities worth Rs10,000 crore next week through open market operations (OMOs). The central bank will purchase long-term securities maturing in 2026, 2029, and 2031, according to an RBI notification.

“In a review of the current liquidity and financial conditions, the Reserve Bank has decided to conduct purchase of government securities under Open Market Operations for an aggregate amount of Rs10,000 crore on 24 September 2020,” the central bank said.

Since March, RBI has conducted several simultaneous purchase and sale of government securities under OMOs. These exercises, termed Operation Twist, are aimed at managing yields in the market. By tweaking long-term yields, RBI wants to lower the long-term interest rates to stimulate a weak economy. Till 31 July this financial year, RBI injected Rs1.24 trillion through OMO purchases.

The announcements about Operation Twist conducted from December to June have resulted in a cumulative fall in G-sec yield by 23 basis points, according to a study published by RBI in the annual report.

The central bank last used this tool in July to accelerate monetary transmission.

Transmission to bank lending rates has improved with the weighted average lending rate on fresh rupee loans declining by 91 bps during March-June 2020, said RBI. The spreads of three-year AAA-rated corporate bonds over G-Secs of similar maturity have declined from 276 bps on 26 March 2020 to 50 bps by end-July 2020. Even for the lowest investment grade bonds (BBB-), spreads have come down by 125 bps by end-July 2020.

RBI’s simultaneous sale and purchase of government bonds, along the lines of the US Federal Reserve’s Operation Twist, is expected to stimulate private sector borrowing and dampen term premia to aid the Centre’s borrowing programme by making it cheaper.