RBI Announces Special Open Market Operations (OMOs) of Simultaneous Purchase and Sale of Government’s Securities

By: Gannicus Oliver
Gannicus Oliver
Gannicus Oliver is an author, consultant, digital economy enthusiast and investor. He boasts over three years of bonds, real… read more.
on Aug 26, 2020
Updated: Aug 27, 2020
  • RBI stated it would purchase 200 billion rupees of bonds and sell an equivalent amount of bill.
  • Indian government bond yields dropped abruptly after the announcement of the special OMOs.
  • The Reserve Bank will buy some securities worth Rs 10,000 crores through the multiple price auction method.

The Reserve Bank of India declared on Tuesday that it would simultaneously buy and purchase longer tenor bonds through two tranches in two special open market operations (OMOs) on the 27th of August, 2020, and 3rd of September, 2020.

Amid the move, India traders weren’t impressed and say the Bank has to do more to assure investors.

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Indian government bond yields decreased shortly after the announcement of the special OMOs worth 200 billion rupees in order to raise funds for the country’s economy.

The RBI is following a special OMOs – similar to that of Federal Reserve-style ‘Operation Twist,’ where longer tenor bonds are bought, and shorter-dated bonds of the same equivalent are sold.

COVID-19 and Indian Economy

India has been a constant borrower of considerable funds to support its economy amidst the coronavirus pandemic due to the fall in its revenues due to the weak demand in the country.

The Reserve Bank stated that it would purchase 200 billion rupees of bonds, and at the same time, selling short-dated treasury bills in two special OMOs.

Meanwhile, the Reserve Bank conducted two open market operations aggregating Rs 30,000 crore in two tranches in March to boost market liquidity. It is essential to note the first tranche of the auction was worth Rs 15,000 crore, while the second got a more significant response from the market.

At the moment, profits on bonds have increased in eight trading sessions out of nine, increasing it to 22 bps in the last trading sessions on Monday. The following day, the benchmark ten-year bond profits decreased to 9 bps after the Reserve Bank’s special announcement.

Murthy Nagarajan, head of fixed income at Tata Asset Management, said:

“They (RBI) came because all other auctions could have failed.”

He also added:

“There is a disconnect. RBI intervention was expected when the 10-year was at 5.90%-6.0%; they did not come in, which led to this problem. RBI will need to do two more ‘Operation Twist’ for the market to settle down.”Bond shares dipped a little after the Reserve Bank kept rates on hold on the 6th of August. Investors believe the ten-year bond will increase by 6.30% this week.

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