Yields on government bonds dropped sharply on Friday after the Reserve Bank of India (RBI) announced purchasing of long-term securities and selling of short tenure ones simultaneously through open market operations.
On Friday, the yield on 10-year government benchmark bond dropped 15 bps on Friday to close at 6.60% — the biggest fall since October 9, thus narrowing the gap with the repo rate. The yield on 2020 paper jumped 5 bps.
In fact, the intention behind this exercise — termed Operation Twist — is to manage the yields. This will address the issue of liquidity. Liquidity was abundant at the shorter end but not so much at the longer end. But by making liquidity available at the long end, the move will help in monetary transmission, bankers said.
“Today, Operation Twist turned the market sentiment dramatically. RBI’s action led to easing of rates of long term 10-year bond yield by 2%,” Shrikant Chouhan, senior vice-president, equity technical research, Kotak Securities.
“Falling long-term bond yields also aid rate-sensitive sectors like auto and real estate, which ended in positive territory,” he added. The central bank said it will buy ₹10,000 crore of 6.45% government bonds maturing in 2029 and simultaneously sell ₹10,000 crore of short-term bonds maturing in 2020 on Monday.
Operation Twist was undertaken by the U.S. Federal Reserve in 2011-12 to make long term borrowing cheaper.
