RBI announces third round of 'Operation Twist' on 6 January2 min read . Updated: 02 Jan 2020, 10:08 PM IST
- Reserve Bank to buy two new long-term govt securities, in addition to 10-year bonds
- In the first OMO on 23 December, RBI purchased ₹10,000 cr worth of 2029 long-term securities
MUMBAI : The Reserve Bank of India (RBI) on Thursday announced its third round of simultaneous purchase and sale of government securities under the special open market operation (OMO).
Typically, the central bank conducts OMO sales to suck out excess liquidity in the financial system, or OMO purchases to infuse liquidity in a single day.
The RBI said it will purchase two new long-term government securities, maturing in 2024 and 2026, in addition to the 10-year bond maturing in 2029. The short-term securities include 6.65% maturing on 9 April 2020, 7.8% maturing on 3 May 2020, and 8.27% maturing on 9 June 2020, besides the 8.12% bond maturing on 10 December 2020.
In the first special OMO conducted on 23 December, the RBI had purchased ₹10,000 crore worth of 2029 long-term securities, for which it had received bids worth ₹20,826 crore. The central bank also sold short-term bonds worth ₹6,825 crore against bids worth ₹20,330 crore in the first round.
In the second tranche, the RBI had bought ₹10,000 crore of long-term securities, for which it received bids worth ₹25,698 crore. In turn, it sold only ₹8,501 crore of short-term bonds, for which it had received bids amounting to ₹38,551 crore.
“On review of the current liquidity and market situation, and an assessment of the evolving financial conditions, the RBI has decided to conduct simultaneous purchase and sale of government securities under OMO for ₹10,000 crore, each, on 6 January 2020," the RBI said in a statement on Thursday.
The central bank’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, as well as dampen term premia to aid the centre’s borrowing programme by making it cheaper. Term premia, which is the difference between the 10-year government bond yield and the repo rate, has reduced to 135 basis points (bps) from 160bps on 19 December, when the first auction was announced.
The results of the third OMO will be announced on 7 January, the RBI said. “We are heading towards more such operations, but I don’t think the yield on the 10-year Gsec has cooled down to that extent. It appears that the impact of these simultaneous purchase and sale of bonds has been somewhat limited from the second auction. The RBI is bringing about the correction in the yield curve by reducing the differential between the long- and short-term bond yields. The third tranche is talking about not only 10-year securities but also shorter tenures, showing the central bank’s attempt to make adjustments to all of these tenors," said Madan Sabnavis, chief economist, Care Ratings.
The 10-year bond yield stood at 6.57% on 23 December (first special OMO), at 6.54% on 30 December (second OMO) and closed at 6.50% on Thursday.