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RBI brings back bond swapping program ‘Operation Twist’

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. (Photo: Mint)Premium
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. (Photo: Mint)

  • RBI to conduct purchase and sale of government securities under open market operations for Rs10,000 crore each on 27 April
  • The central bank to purchase long-dated securities with tenor between 6-10 years

The Reserve bank of India on Thursday decided to bring back its bond swapping programmed billed as India’s Operation Twist with an aim to help monetary transmission.

The RBI said that it will conduct purchase and sale of government securities under open market operations (OMO) for Rs10,000 crore each on 27 April.

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 central bank will purchase long-dated securities with tenor between 6-10 years aggregating Rs10,000 crore, while it will sell short-dated securities maturing June 2020, October 2020 and April 2021.

The benchmark 10-year bond yield on Thursday dropped 20 basis points to 6.02% from previous closing of 6.22% following the announcement.

Bankers see this as a move to neutralise liquidity in the system as RBI looks to bring down rates. “RBI is looking to buy liquid G-sec papers. It is expected to bring down rates even on corporate bond papers. This will force banks to pass on lower rates to customers," said the treasury head of a public sector bank.

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. RBI had last used this tool in January when the debt market was showing signs of stress due to government’s borrowing program of Rs7.1 lakh crore for fiscal year 2019-20. Governor Das had admitted that Operation Twist had helped in better transmission of the central bank’s 135 basis points of rate cuts last year.

With the government borrowing for the current fiscal year pegged at a record Rs7.8 lakh crore, bond dealers expect another 5 rounds of operation twists to be announced over a span of 2-3 weeks.

“RBI’s buying of T-bills from the secondary market in the first week of April has brought down T-bill rate below the reverse repo rate. This has resulted in the monetary transmission on the shorter end. However the yields on the long dated securities has remain unaffected. Operation Twist will therefore help RBI to move that transmission on the longer end," said Naveen Singh, senior vice president at ICICI Securities Primary Dealership Ltd.

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