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The central bank will conduct the simultaneous sale and purchase of  ₹10,000 crore of government securities of varying tenor today. (Photo: Aniruddha Chowdhury/Mint)
The central bank will conduct the simultaneous sale and purchase of 10,000 crore of government securities of varying tenor today. (Photo: Aniruddha Chowdhury/Mint)

RBI’s Operation Twist may aid govt’s borrowing plan

  • Simultaneous sale, purchase of govt bonds may spur private sector borrowing
  • RBI’s move resembles that of the Fed in 2011 to make long-term borrowing cheaper and spur bank lending

MUMBAI : The Reserve Bank of India’s (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, experts said.

The central bank 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 will sell short-term bonds of 10,000 crore, it will also purchase long-term securities of the same value. While the net liquidity in the system will remain unchanged, experts said that 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 basis points (bps), making the yield curve steeper. RBI’s Operation Twist will now help recalibrate the yield curve.

Moreover, with the long-term yields coming down, the government will be able to borrow money cheaper against its bonds, as well as induce demand for private sector loans. “What it will do is positively affect the government’s borrowing programme. Some of that is expected to be done in the next three months. So from that point of view, the move will possibly help in keeping yields down by 10-15 bps, depending on how much more the long tenor rates go down," said Karthik Srinivasan, head, financial sector ratings, ICRA.

RBI’s operation resembles that of the Fed that was announced in September 2011 and ran through end-2012 to make long-term borrowing cheaper and spur bank lending. The Fed had swapped short-term bonds for longer-term debt.

As RBI will buy long-term bonds, its demand will go up and yields will go down and the opposite will happen when it sells bonds. Through this, the central bank is narrowing out the differential between the short- and the long-term yields or smoothening the yield curve.

A day after the announcement, the 10-year benchmark bond yield fell 15bps, to 6.60% and the yield on the one-year bond rose 5bps on Friday.

According to a 20 December note by Radhika Rao, an economist at DBS Bank, there was no indication from RBI whether Operation Twist was a one-time exercise or part of continuing operations. “Given the scope of likely additional borrowings in early 2020, we reckon more are likely to follow to limit the rise in the longer-tenor yields," she said.

Rao, who expects the yield curve to flatten because of RBI’s move, said that over the past few months, long-term bonds failed to rally despite further RBI monetary easing, widening the 10-year premium against the repo rate to 140-150bps. “Most of this is driven by fears of fiscal slippage and more recently, indications that the RBI may be on pause after an aggressive cut cycle," she said. The Centre had announced in September that it would borrow 2.68 trillion from the bond market in the second half of FY20, maintaining the full-year gross borrowing target at 7.1 trillion. However, there are concerns that the government might borrow more to meet its fiscal deficit target.

Meanwhile, after lowering its repo rate by 135bps in five consecutive rate cuts between February and October, the central bank’s monetary policy committee (MPC) decided to keep rates on hold in December. The MPC had said it will wait for further government measures in the forthcoming budget and take a note of the pass-through of future policy actions before taking a decision to cut rates.

Of late, the long-term yields have gone up on account on market perception that the government borrowing programme will be exceeded because there are problems on the fiscal side, said Madan Sabnavis, chief economist at CARE Ratings.

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