RBI Finally Comes to Market With Operation Twist to Cool Yields
Indian one hundred rupee banknotes are arranged for photograph in India. (Photographer: Dhiraj Singh/Bloomberg)

RBI Finally Comes to Market With Operation Twist to Cool Yields

India’s central bank will resume its Federal Reserve-style Operation Twist after weak demand at two successive auctions and inflation concerns drove up yields. Sovereign bonds climbed.

The Reserve Bank of India will purchase 100 billion rupees ($1.3 billion) of bonds and sell an equivalent amount of shorter debt on Aug. 27 and Sept. 3, respectively, it said in a statement. The last such operation was held on July 2.

“This was expected given the panic response that saw yields surging in the last two sessions after Friday’s auction,” said Pankaj Pathak, debt fund manager at Quantum Asset Management Ltd. in Mumbai. “RBI needs to be more frequent in their OMO announcements, given the huge supply.”

RBI Finally Comes to Market With Operation Twist to Cool Yields

Indian government bonds have been under pressure after the RBI left rates unchanged at its August meeting and refrained from announcing measures to support a market facing a record 12 trillion rupees of debt supply this fiscal year. The latest minutes showed that the central bank’s rate-setting panel had turned less dovish with higher inflation.

Yield on the most traded 5.79% 2030 bonds slid seven basis points to 6.16%. The new benchmark 5.77% 2030 debt was down four basis points to 6.13% after surging over 30 basis points in the past three weeks.

Poor Demand

Market strains became more evident after a sale of benchmark 10-year debt had to be rescued by underwriters on Aug. 14. The Aug. 21 auction of longer bonds saw cutoff yields that were higher than expected, leaving traders wondering whether the authority was signaling that yields may head higher.

The RBI on Tuesday said it would buy bonds maturing in 2024, 2027, 2030, 2032 while selling 182-day treasury bills on Aug. 27.

Analysts said the monetary authority must be more frequent in its interventions, given the huge supply.

“The market wants to see a series of open-market operations to keep yields under check,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank.

Separately, Indian states sold a combined 138.5 billion rupees of debt on Tuesday at yields traders said were in line with expectations.

©2020 Bloomberg L.P.

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