RBI Announces Third Round Of Operation Twist
The central bank has announced its third round of simultaneous purchase and sale of government securities.
The Reserve Bank of India has announced its third round of simultaneous purchase and sale of government securities.
The central bank would purchase Rs 10,000 crore worth of long-term government bonds and sell an equivalent amount of short-term securities, according to its notification on Thursday. Unlike in the last two rounds, the RBI will now buy bonds maturing in 2024 and 2026, besides the 10-year bond maturing in 2029. At the same time, it will sell short-term government bonds maturing in 2020.
Beginning in late December last year, the central bank has been conducting these special open market operations to improve systemic liquidity and ease borrowing conditions in money markets, taking its cue from the Operation Twist strategy that was adopted by the U.S. Federal Reserve in 2011.
By purchasing longer-dated securities yields on long-term bonds reduce while the sale of short-term securities, at the same time, pushes short-term bond yields upwards.
On Jan. 6, the RBI will purchase up to Rs 10,000 crore worth of the following long-term government securities:
- 7.23 percent government bond maturing on Jan. 28, 2024.
- 7.27 percent government bond maturing on April 8, 2026.
- 6.45 percent government bond maturing on Oct. 7, 2029.
Simultaneously, it will sell up to Rs 10,000 crore worth of short-term government bonds, similarly to that notified in the earlier two rounds:
- 6.65 percent government bond maturing on April 9, 2020.
- 7.8 percent bond maturing on May 3, 2020.
- 8.27 percent bond maturing on June 9, 2020.
- 8.12 percent bond maturing on Dec. 10, 2020.
The central bank has not specified a security-wise amount of bonds it seeks to purchase and sell in the coming auction.
Results Of Operation Twist
In the first special OMO auction which took place on Dec. 23 last year, the RBI purchased Rs 10,000 crore worth of 2029 government bonds for which it had received bids worth Rs 20,826 crore.
The central bank sold Rs 6,825 crore worth of short-term government bonds against Rs 20,330 crore worth of bids, during the first round.
The RBI purchased another Rs 10,000 crore worth of 2029 bonds in the second round of special OMO auctions on Dec. 30 last year. It had received Rs 25,698 crore worth of bids.
At the same time, the central bank sold Rs 8,501 crore worth of short-term government bonds during the second round for which it had received bids amounting to Rs 38,551 crore.
Apart from easing borrowing rates for companies in the bond markets and improving liquidity, the central bank’s exercise is aimed at reducing the “term premia”, which has been elevated for several months despite a cumulative reduction of 135 basis points by the RBI in the repo rate since February 2019.
The term premia represents the additional interest that must be paid to borrow longer-term money, and is measured by the difference between the 10-year government bond yield and the repo rate.
Since announcing the first simultaneous bond purchase and sale, the term premia has reduced to 136 basis points on Jan. 2, 2020 from 160 basis points on Dec. 19, 2019, according to Bloomberg data.
The yield on the 10-year government bond stood at 6.51 percent while the one-year government bond yield stood at 5.46 percent as on Jan. 2.
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