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This article is more than 1 year old.

Here's why RBI announced special OMO of Rs 20,000 crore

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The Reserve Bank of India's (RBI) Rs 20,000 crore special market operation announcement coming just minutes before the bond markets opened for trade this morning helped cool down yields.

Here's why RBI announced special OMO of Rs 20,000 crore
The Reserve Bank of India's (RBI) Rs 20,000 crore special market operation announcement coming just minutes before the bond markets opened for trade this morning helped cool down yields.
Bond yields have been rising over the past month but cross the psychological level of 6 percent last week after the central bank's minutes of the Monetary Policy Committee meet showed that it expects inflation to rise. The MPC hinted that it may be restrained from bringing down policy rates any further due to rising inflation — controlling which is its primary mandate.
The central bank, therefore, announced yet another operation twist this morning to put an end to the steady rise in yields which was pushing up the borrowing costs.
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"On a review of current and evolving liquidity and market conditions, the RBI has decided to conduct simultaneous purchase and sale of government securities under Open Market Operation (OMO) for an aggregate amount of Rs 20,000 crore in two tranches of Rs 10,000 crore each. The auctions would be conducted on August 27, 2020 and September 03, 2020," it said in its announcement this morning.
This means that RBI will purchase and buy government securities at the same time. It will buy long-term bonds for which there is very little appetite in the market, and simultaneity sell short-term paper for which there is plenty of appetite, thereby attempting to twist the yield curve. RBI announced it will buy 4 year, 7 year, 10 year and 12 year government securities amounting to Rs 10,000 crore and also sell short term papers maturing in 2020 amounting to another Rs 10,000 crore.
While the market expected the central bank to come to the markets to buy bonds to support the government's large borrowing programme, the bearish MPC minutes shook the market’s confidence. Bonds yields surged by 24 basis points in the last six trading sessions.
Soon after RBI announced its operation twist, bond yields cooled off by about 5 basis points to 6.129 percent from the last closing price. One basis point is one hundredth of a percentage point.
Experts believe that RBI would have to give markets confidence that it will conduct such open market operations more regularly for bond yields to fall below 6 percent.
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