Bond yields in India increase by 6.16% after RBI resumes its Federal Reserve Style Operation Twist

This Wednesday, India’s Reserve Bank stated that it would buy and purchase longer tenor-bonds through two tranches in two special operations. Following the announcement, yields on 5.79% 2030 bonds moved up to 6.16% by seven basis points. It’s essential to know that the latest benchmark 5.77% 2030 debt decreased by four basis points before moving up by 30 basis points in the past three weeks.

The Central Bank bought 100 billion rupees ($1.3 billion) of bonds and sold an equivalent amount of shorter debt on the 2^nd of August, 2020.

The RBI follows 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. The bank is set to perform another special operation on the 27^th of August, 2020, and the 3^rd of September 2020.

So far, the RBI has conducted five of such operations since January worth 500 billion rupees since it introduced them late last year. Other tools the Central Banks aim to use at its disposal include purchasing debt in the secondary market, raising banks’ limit for buying bonds, and a rate cut. 

Panic response from investors had a huge impact on bonds’ gain

In India, bonds climbed after the RBI said it would resume its Fed-style Operation Twist to cool after two open market operations and inflation boosted yields.

India’s yield curve steepened two months ago after RBI stayed away from announcing discreet bond purchases for several weeks, even as the government executed its record of 12 trillion rupees of bond sales in the current fiscal year.

However, RBI’s latest measure has continued to calm the markets and increase bond yields, and it needs to be constant with the announcement of special Open Market Operations.

Pankaj Pathak, debt fund manager at Quantum Asset Management Ltd. in Mumbai, said:

“This was expected given the panic response that saw yields surging in the last two sessions after Friday’s auction. RBI needs to be more frequent in its OMO announcements, given the huge supply.”

Market tensions became more evident after the sale of benchmark ten-year debts had to be salvaged by investors on the 14^th of August, 2020. The auction of longer bonds last week saw bond yields increase much higher than expected, thus leaving traders and investors deliberating whether the Central Bank indicated that yields might climb higher.

RBI’s ‘Operation Twist’ may be the antidote for India’s steepening curve, but before then, let’s keep our fingers crossed and see what happens next in the country’s economy before the year closes.