Another round of Operation Twist in offing

The bond market was expecting the Reserve Bank to absorb the excess supply of government papers since this was the first time in six months that the central bank was going for an outright purchase of bonds.

The Reserve Bank of India (RBI) on Thursday rejected all bids received in its first outright bond purchase of the fiscal year and announced another edition of Operation Twist, signalling its determination to bring down long-term yields.

The bond market was expecting the Reserve Bank to absorb the excess supply of government papers since this was the first time in six months that the central bank was going for an outright purchase of bonds. (REUTERS)

Against the ₹10,000 crore of long-term bonds that it had planned to buy under open market operations (OMO), the central bank received bids totalling ₹66,473 crore, or more than six times its target, and their rejection indicates RBI’s discomfort with the high yields demanded by investors.

The purchase of these bonds, maturing between 2026 and 2031, was announced last week.

The purpose is to bring down the 10-year benchmark yield, which has crossed 6%, making the government’s borrowing plan expensive.

The bond market was expecting the Reserve Bank to absorb the excess supply of government papers since this was the first time in six months that the central bank was going for an outright purchase of bonds.

In this fiscal year so far, RBI had been pursuing Operation Twist—simultaneously buying and selling bonds of equal amounts to bring down long-term yields.

On Thursday, RBI also announced the next edition of Operation Twist for ₹10,000 crore on October 1.

The central bank will purchase bonds maturing between 2025 and 2029, and sell Treasury bills maturing in 2021.

Market participants were, however, puzzled as the RBI did not make up for the bond offer they turned down by coming out with a higher amount of bonds under Operation Twist.

“RBI has not made up for the deficit. If they wanted to keep the market in good spirit, they should have announced a ₹20,000 crore Operation Twist. There is currently so much supply of government securities on a weekly basis that RBI should absorb some of it. That’s the only way yields will remain under control,” said a bond dealer at a private sector bank. “We are expecting the yields to inch up in tomorrow’s trade.”

In an attempt to keep borrowing costs lower for the government, RBI is putting pressure on the market by refusing to absorb funds at a higher yield and also ensuring that there is a weekly bond auction.