RBI conducts first simultaneous OMO, buys more bonds than it sells

The Reserve Bank of India (RBI) conducted its first simultaneous ‘buy and sell’ open market operations (OMOs), in which it bought more bonds than it sold, showed results.

The central bank had planned to buy up to Rs 10,000 crore of 10-year bonds and sell up to Rs 10,000 crore of four short-term bonds. The auction results, however, showed that while the RBI bought its full quota of 10-year bonds, it sold just Rs 6,825 crore, in aggregate, of short-term bonds maturing in the next one year.  

The trading session was extended by half an hour for the purpose. There was apprehension in the market that the sale of short-term bonds would push up yields despite adequate liquidity, and this could be something that the central bank desired to do. 

However, the partial sale won’t disturb short-term yields for long, said bond dealers. On the contrary, the RBI seemed to be uncomfortable with the yields quoted. The cut-off yield on the 10-year bond came in at 6.5462 per cent, slightly lower than the closing figure of 6.5680 per cent. The 10-year bond yields stood at 6.75 per cent before the OMO announcement last week. 

The RBI received offers of about Rs 20,826 crore for the 10-year bond purchase. For the short-term bonds, it got offers of close to Rs 20,330 crore.

The cut-off in the four bonds were between 5.22 and 5.578 per cent, higher by 4-5 basis points from their current market rate. 

Bond dealers said there was no need to conduct the OMO to impact short-term bond yields, given that they are dependent on liquidity. The average liquidity level is at Rs 2.5 trillion at present. 

If it reduces from here — which is likely by the year end — the short-term bond yields will rise anyway. Most banks have linked their retail lending rates to the repo, which remains at 5.15 per cent, and could reduce to 4.75-4.5 per cent during this rate cutting cycle, said dealers.

There is, however, some benefit in bringing longer-term yields down. The market is certain the government will borrow extra, given that the fiscal deficit is likely to widen. Softer yields help the government borrow cheap. Besides, they benefit a host of borrowers. 

“The 10-year central government security works as a base for pricing state development loans and corporate bonds of similar maturity. Following the announcement of the special OMO, the 10-year yield of the central government security has come down, along with the yields of state development loans and corporate bonds. In addition, the spreads between long-term and short-term yields have narrowed slightly,” said Hemal Doshi, vice-president (treasury) of SBI DFHI, a primary dealer.

However, if the OMO happens to be a one-off, the RBI is unlikely to get its desired result as the 10-year yields will likely reprise itself, say bond dealers. But it is unlikely to be a one-off and more such OMOs can be expected going forward, as the government readies itself for excess borrowing, bond dealers say.