RBI to buy and sell bonds worth Rs10,000 crore to tame the yield curve
20 December 2019
With the yields on government bonds rising sharply the Reserve Bank of India will conduct a simultaneous sale and purchase of bonds, in an attempt to bring down longer-term yields.
This is because the yield curve has defied RBI’s policy moves of cutting the key repo rate by 135 bps since February this year at a time when the government is forced to borrow more from the market to fund its fiscal deficit, which could push up bond yields further.
The benchmark 10-year yield had risen as much as 37 basis points to 6.84 per cent from its level before the RBI devcided to keep rates steady this month. It is currently up 28 bps.
RBI on Thursday announced plans to conduct special open market operation (OMO), during which the central bank will buy Rs10,000 crore worth of the benchmark 10-year bonds and sell four dated securities maturing in 2020 for an equivalent amount.
RBI is puzzled with the rising bond yields despite its lowering of policy interest rate by 135 basis points during the course of the year. The lowering of interest rates, however, has not helped push up economic growth in the country. Nor did it give any big boost to credit demand.
Simultaneously buying long-end bonds and selling short-end bonds should lead to a flattening of the yield curve.
RBI said the decision to undertake simultaneous buy and sell operations is based on a review of the liquidity condition and an assessment of the current market situation.
Also, with the government expected to announce measures to tackle the growth slowdown in the federal budget in February, there are serious concerns of further fiscal slippage this year.
The government may be forced to borrow more from the market to fund its fiscal deficit which could push bond yields up further.