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RBI buys 10,000 crore bonds, sells 6,825 crore short-term securities

RBI’s simultaneous sale and purchase of government bonds is expected to dampen term premium to stimulate private sector borrowing. (Mint )Premium
RBI’s simultaneous sale and purchase of government bonds is expected to dampen term premium to stimulate private sector borrowing. (Mint )

  • RBI’s simultaneous sale and purchase of government bonds is expected to dampen term premium to stimulate private sector borrowing
  • Participants in the auction were looking to buy the bonds at a lower price than what RBI was willing to sell them for

MUMBAI : The Reserve Bank of India (RBI) on Monday said it bought 10,000 crore of long-term bonds and simultaneously sold 6,825 crore of short-term papers under a special open market operation (OMO).

Thus, while most sellers of long-term papers made the cut-off yield and price set by RBI, less than half the short-term bond buyers could do so.

According to market experts, the reason for the shortfall in the sale, despite over 20,000 crore offered by buyers, is that bidders quoted a higher yield or a lower price than the cutoff. Prices and yields move inversely in bonds.

Experts added that participants in the auction were looking to buy these bonds at a lower price than what RBI was willing to sell them for.

The central bank had set the cutoff yield and price for the four short-term securities, of roughly one-year tenor, at between 5.28-5.60% and between 100.37-102.32, respectively. “The purpose of this entire exercise is to correct the yield curve and if the price or yield quoted does not match that of the central bank’s expectations, then the purpose is defeated," said a senior official at a private sector bank.

RBI said in a statement on Monday that it received 116 bids worth 20,330 crore for sale of short-term government securities. Of these, the central bank said, it accepted 35 bids of 6,825 crore.

On the other hand, RBI bought 10,000 crore worth of the 10-year benchmark bonds from 145 participants. The central bank said it received bids from 161 sellers worth 20,826 crore. The cut-off yield and price for the 10-year paper was at 6.54% and 99.3, respectively. Meanwhile, the 10-year benchmark bond yield fell 3bps on Monday to 6.57%.

“It looks like the RBI is working towards lowering the long-term yields further because they had a cut-off of 6.54% for the long-term bond. The 10-year bond yield stood at 6.6% on Friday. I think there will be a series of such operations till the time RBI is satisfied with the yield," said Madan Sabnavis, chief economist at CARE Ratings.

Mint reported on 22 December that RBI’s simultaneous sale and purchase of government bonds, on the lines of the US Federal Reserve’s Operation Twist, is expected to dampen term premium to stimulate private sector borrowing, as well as aid the government’s borrowing programme by making it cheaper.

The central bank had announced on 19 December that it will conduct simultaneous sale and purchase of 10,000 crore of government securities of varying tenor on 23 December.

While it had planned to sell short-term bonds of 10,000 crore, it was also to purchase long-term securities of the same value. This was primarily to correct the anomaly between the yields of short and long-term bonds will be corrected.

Yields in the short term had fallen below RBI’s benchmark repo rate of 5.15% and the term premium for long-dated paper had touched around 150 bps, making the yield curve steeper. RBI’s Operation Twist will now help recalibrate the yield curve.

ABOUT THE AUTHOR

Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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