By Subhadip Sircar and Kartik Goyal


Benchmark 10-year bonds rallied from close to a three-month low after the central financial institution mentioned it would purchase Rs 10,000 c rore ($1.four billion) of longer-tenor bonds whereas promoting shorter debt in a transfer harking back to the US Federal Reserve’s Operation Twist.

The yield on the 2029 debt fell as a lot as 16 foundation factors to six.59%, probably the most in additional than two months, making it Asia’s prime performer. The 7.57% 2033 yield additionally slid 20 foundation factors. Yields on the 6.35% 2020 bond — a really short-end paper — jumped 20 foundation factors.

The transfer had been urged by some merchants and strategists as a method to cross on extra of the central financial institution’s 5 price reductions this yr to companies and particular person debtors. With funding and consumption each weak in India, coverage makers try to spur credit score and carry progress from a six-year low.

Operation Twist: RBI adopts a Jerome Powell manoeuvre

‘Operation Twist’

20 Dec, 2019

The Reserve Financial institution of India will conduct a simultaneous sale and buy of bonds, it mentioned on Thursday, in a transfer seen by market members as an try and convey longer-term yields decrease. It’s the first time RBI could be conducting a particular OMO of this sort, much like the ‘Operation Twist’ carried out within the US close to the beginning of the last decade.

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What has RBI introduced?

20 Dec, 2019

The central financial institution mentioned it could purchase authorities securities (G-Secs) with a 10-year maturity whereas, on the identical time, promote authorities bonds with simply one-year maturity — each value Rs 10,000 crore every on Monday.

What’s Operation Twist?

20 Dec, 2019

Operation Twist is the identify given to a financial coverage software that the Jerome Powell-led US Federal Reserve had began to affect the speed of curiosity on this planet’s largest financial system. The method entails shopping for and promoting of each short- and long-term authorities bonds — relying upon its goal referring to charges — on the identical time. The tactic was later adopted by a number of different central banks.

Why this transfer by RBI?

20 Dec, 2019

Economists have been anticipating the central financial institution to launch this particular manoeuvre in order that price cuts by it since February this yr may result in a commensurate drop within the price of curiosity within the financial system. Though RBI has reduce rate of interest 5 instances this yr by a complete of 135 foundation factors, the yield on the 10-year G-Secs has come down by solely 80 bps — from 7.55% in early-February to its Thursday’s shut of 6.75%. Even much less has been the drop in price of curiosity that banks cost to their debtors.

So, how will it work?

20 Dec, 2019

On December 23, RBI will purchase 10-year GSecs value Rs 10,000 crore and, on the identical day, it would additionally promote one-year bonds of 4 different tenures value Rs 10,000 crore in all. For the reason that value of a bond and the yield on it transfer in reverse instructions, shopping for of a bond pushes up its value and pulls down the yield. By shopping for 10-year bonds, RBI desires to convey down the benchmark yield — one of many primary determinants of the speed of curiosity banks cost their debtors.

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“The relentless steepening of the yield curve is getting pacified by the RBI coming in and signaling ‘I’m right here to help,’” mentioned Lakshmi Iyer, chief funding officer for fastened revenue at Kotak Mahindra Asset Administration Co. in Mumbai. “This transfer brings some form of a sanity test.”

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The Reserve Financial institution of India in an announcement late Thursday mentioned it would purchase Rs 10,000 crore of the 2029 debt and promote an equal quantity of notes maturing subsequent yr in an public sale on Monday.

The idea is much like Operation Twist utilized by the Fed in 2011-2012 in an effort to cheapen long-term borrowing and spur financial institution lending. The Fed then swapped short-term Treasury securities for longer-term authorities debt, which decreased the hole between two- and 10-year yields.

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In India, the distinction between the benchmark 10-year yield and the RBI’s coverage price was 160 foundation factors earlier than the announcement. That’s method increased than the common unfold of 55 foundation factors seen throughout the 2015-2017 easing cycle, in keeping with Deutsche Financial institution.

The steepening of the curve within the longer finish displays considerations in regards to the authorities including to report borrowing because it will get able to prime the financial system. The slowdown has strengthened doubts in regards to the administration assembly its price range purpose of three.three% of GDP this fiscal yr.

“The RBI ought to enhance the depth of its Operation Twist through extra vigorous switches of presidency bonds targeted on securities within the tenure of 7-10 yr plus,” mentioned Madhavi Arora, economist at Edelweiss Securities Ltd.

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Future operations will rely upon the success of Monday’s public sale, merchants say.

“There’s restricted urge for food for short-end bonds so the RBI might want to provide increased yields,” mentioned Naveen Singh, head of fixed-income buying and selling at ICICI Securities Main Dealership.