The Reserve Bank of India will conduct a fourth round of simultaneous purchase and sale of government bonds on Jan. 23, under its special open market operations being dubbed as ‘Operation Twist’.
The central bank will once again simultaneously buy and sell up to Rs 10,000 crore worth of government securities, it said in a notification on Thursday.
The RBI will buy:
- 7.32 percent government bond maturing on Jan. 28, 2024
- 6.45 percent government bond maturing on Oct. 7, 2029
Simultaneously, the RBI will sell:
- 7.8 percent government bond maturing on April 11, 2021
- 7.94 percent government bond maturing on May 24, 2021
In late December last year, the RBI began conducting these special bond purchase and sale operations to reduce the spread between short term and long term interest rates in the bond market. Long term rates have remained high despite 135 basis points in policy rates, while short term rates have fallen due to surplus liquidity.
The purchase of longer-dated securities helps reduce the yields on long-term bonds, while the sale of short-term government securities can pushe short-term bond yields upwards. This policy is inspired by the U.S. Federal Reserve’s Operation Twist strategy that was adopted in 2011.
Results of Operation Twist
The central bank’s efforts have been only partially successful.
Since announcing the first round of special OMO auctions, the spread between the RBI’s repo rate of 5.15 percent and the prevailing 10-year bond yield has reduced to 145 basis points as on Jan. 16, 2020 from 160 basis points on Dec. 19, 2019, according to Bloomberg data. This remains wider than the historical average.
The spread between the one-year government bond yield and the 10-year now stands at 90 basis points compared to 120 as on Dec.12, 2019.
As of Jan. 16, the yield on the 10-year government bond stood at 6.61 percent while the one-year government bond yield stood at 5.7 percent.
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