Operation Twist Returns to Send India’s Bond Yields Plunging

RBI will buy R 10,000 cr of bonds maturing between 2026 and 2030 on April 27, and sell the same amount of short-term bills.

24 Apr 2020, 05:04 AM IST

Operation Twist Returns to Send India’s Bond Yields Plunging

A pedestrian walks past the Reserve Bank of India (RBI) building in Mumbai, India. (Photographer: Kanishka Sonthalia/Bloomberg)

(Bloomberg) -- The benchmark sovereign bond in India surged after the central bank said it would redeploy a debt operation akin to the Federal Reserve’s Operation Twist.

The yield on the 10-year bond dropped 20 basis points, the most since March 27, to 6.02%, after the Reserve Bank of India said it would buy long-term debt while selling bills.

“The RBI is trying to attack different parts of the curve -- from intervening in treasury bills, buying longer bonds, to offering cheaper credit to shadow banks,” said Manish Wadhawan, founder at Serenity Macro Partners in Mumbai. “The whole aim is to keep the system afloat at a time of lockdown and market dislocation.”

The RBI is returning to a tool it last used in January as the nation’s debt market shows signs of strain from the government’s record borrowings. With the country in a coronavirus-lockdown, foreign funds have been fleeing, making traders increasingly worried about a deluge of issuances.

The central bank will buy 100 billion rupees ($1.3 billion) of bonds maturing between 2026 and 2030 on April 27, and sell the same amount of bills. While the amount is relatively small for the nation’s 60 trillion rupee market, the move suggests the RBI is heeding calls from investors.

The RBI first used this measure in December, which helped ease yields by about 30 basis points from a five-month high of 6.80%. It had also introduced European Central Bank-like cash boost to banks. The central bank chief said last month its unconventional policy steps were helping to boost lending to the real economy.

Unlike its peers in the region such as Bank Indonesia, the RBI has so far refrained from large-scale purchases of bonds. The spread between the RBI’s benchmark lending rate and the nation’s 10-year bond yield widened to the most since 2010 last week as the government kicked-off its record borrowing program, prompting calls for further central bank measures.

“The central bank seems to be addressing the distortion in the yield curve, which would have weighed on the long-term financing needs of the economy,” said Harish Agarwal, a trader with FirstRand Bank Ltd. in Mumbai. “This move is aimed at helping the monetary transmission.”